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I was right about Cineworld shares in September. Here’s what I’m doing now

Roland Head
·3-min read
Halloween pumpkins on the graveyard
Halloween pumpkins on the graveyard

When I covered Cineworld Group (LSE: CINE) in September, I said “I think there’s a good chance Cineworld’s share price will keep falling”. Less than two weeks later, the shares fell 30% when the company said it would close 663 cinemas in the UK and USA until film release schedules return to normal.

Cineworld shares have now fallen by 40% since my September article. The cinema group’s shares are now hovering around 26p, valuing the stock at just £355m. That’s equivalent to a price/earnings ratio of two times 2019 earnings — so is this a recovery buying opportunity?

Cineworld share price? I’d be careful

As I’ve mentioned before, I think the cinema business will recover from coronavirus. In my view, the main risk facing Cineworld shares is that the group’s net debt of $8.2bn will become unmanageable.

In its half-year results, the company said that although it has enough cash to operate for 12 months, management expects the group to breach the terms of its loans until at least the end of 2021.

So far, the company’s lenders have agreed to waive these conditions. In theory, this gives Cineworld a chance to fully reopen and recover. In reality, I think it’s increasingly unlikely.

What I think is much more likely is that when cinemas are eventually able to reopen, Cineworld will try to refinance its loans on more favourable terms than it could get today.

One possible option is that the company will persuade lenders to accept new shares in place of some of the firm’s debt. If that happens, existing shareholders could see the value of their stock fall sharply through dilution.

This possibility is enough to prevent me investing. Although Cineworld’s share price would look cheap in normal times, I think this low price is justified by the risk of further losses for shareholders.

I’m going to stay away. But there’s another media industry stock I would like to buy.

I reckon this wizard firm will beat Cineworld

Companies that provide entertainment for people stuck at home have done well this year. Bloomsbury Publishing (LSE: BMY), which is best known as the publisher of Harry Potter, is no exception.

Bloomsbury’s share price is up by 16% as I write, after the firm said that sales rose by 10% to £78.3m during the six months to 31 August. Underlying pre-tax profit for the period rose by a stunning 60% to £4m.

What’s driven this growth? Unsurprisingly, we’ve all been buying more books to read at home. Bloomsbury says that sales of adult titles rose by 16%, with children’s titles up 18%. Revenue in the non-consumer part of the business was flat at £29.7m, but that doesn’t seem a bad performance to me in the circumstances.

Of course, some of this good news is already reflected in Bloomsbury’s share price. The stock now trades on around 16 times 2021/22 forecast earnings. However, the company’s £176m valuation is supported by net cash of £44m, stable sales and decent profit margins.

Cineworld can’t claim any of these attractions right now. That’s why I’d rather pay a full price for Bloomsbury shares than gamble on Cineworld shares.

The post I was right about Cineworld shares in September. Here’s what I’m doing now appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing. 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 2020