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Should I buy Cineworld shares today?

Rupert Hargreaves
·3-min read
Bold Street is deserted during coronavirus lock down, Liverpool, UK.
Bold Street is deserted during coronavirus lock down, Liverpool, UK.

Cineworld (LSE: CINE) shares have been tossed around over the past year. Rolling lockdowns around the world have caused the company some severe headaches. It does not look as if these issues will go away any time soon.

However, assuming the pandemic is only a temporary challenge, the group could make a comeback. And if it can stage a recovery, I think the stock looks cheap at current levels, and it could be an exciting acquisition for my portfolio.

Are Cineworld shares cheap?

Shares in the cinema company do look cheap at first glance. The stock is changing hands at around 80p today, compared to a price of nearly 190p a year ago.

But this price action does not tell us much about the company’s fundamental performance. Indeed, for much of the past 12 months, most of the group’s cinemas around the world have been closed. That means Cineworld has not been able to generate any income. I think that justifies a significantly lower share price than this time last year.

As such, I think the company’s future will be closely tied to the world’s success in fighting the pandemic. As long as its locations remain closed, the group will continue to lose money as costs will exceed revenues.

At the same time, the company has a tremendous amount of debt. Net-debt-to-EBITDA stood at around two times towards the end of last year.

Generally speaking, I think that if a company has such a ratio of more than two, it is a risky purchase. On that basis, Cineworld shares appear to me to be an incredibly risky proposition. It is certainly not one for the risk-averse.

Recovery potential

Yet while there are plenty of risks attached to Cineworld right now, I feel the company also has plenty of opportunities.

For example, its market capitalisation is currently around £1bn. In 2019, the last full year of uninterrupted business for the organisation, Cineworld produced a net profit of £180m. If it can return to this profitability level, I estimate the corporation is trading at a forward price-to-earnings (P/E) multiple of 5.6. Historically, the stock has traded at a forward P/E of around 15.

I think this shows the potential that Cineworld shares have in the long term. However, these figures are only estimates. There’s no guarantee the business will ever be able to return to 2019 levels of profitability. There’s also no guarantee the company’s cash resources will be enough to keep the lights on until the pandemic recedes.

Therefore, I’m going to keep an eye on Cineworld shares with the target of adding them to my portfolio when there’s more clarity on when the business will be able to reopen. It’s clear to me that the stock could generate high returns when owned as part of a diversified portfolio, but it also comes with plenty of risks. I’m watching it closely.

The post Should I buy Cineworld shares today? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021