The Cineworld (LSE: CINE) share price fell more than 5% on Friday. Over the past 30 days, the shares have fallen 29%. Broadening the horizon, things look even bleaker for the firm, with the share price falling over 45% in the past six months.
The primary reason behind the short-term fall is the Omicron variant and the threat it poses to the leisure sector. This sector was hit extremely hard by the pandemic, with lockdowns leading to customer numbers plummeting. However, does this drop present me with a buying opportunity? Let’s take a closer look.
A good opportunity?
Although the Omicron virus does present a risk for Cineworld, it looks as if its impact won’t be as bad as first expected. If this is the case, we could expect cinema capacity to keep climbing back towards pre-pandemic levels. This is something the firm has almost been able to achieve already, with its most recent report showing that capacity for October had reached 90% of the same period for 2019. If the firm is able to enhance its customer capacity throughout 2022, revenues will begin to recover. This could be a real positive for the Cineworld share price.
Assessing Cineworld shares’ value, they do look very cheap to me. Pre-pandemic, the shares were trading at around 180p. They’re now sitting at just 47p. In addition to this, the firm’s price-to-earnings ratio is just 2.5 times. For context P/E ratios below 10 are considered very good value.
Cineworld share price risks
Of course, the Cineworld share price being cheap makes sense. The firm’s most recent results were pretty appalling. For the six months up to June 2021, revenue came in at just $292m, down from over $700m in the same period in 2020 (which was itself very weak). In addition to this, debts have climbed to $4.6bn. Shrinking revenues and growing debts are a red flag for any firm.
The current economic environment also worries me. With inflation on the climb, many investors are expecting a rise in interest rates. The next Monetary Policy Committee meeting will be held on 16 December, where a potential rate decision will be made. If they do rise, it’s likely to magnify the large debts the firm has amassed throughout the past 18 months.
In addition to this, as my fellow Fool Royston Wild pointed out, the number of shares held in short positions has been growing substantially over the past few months. Around six months ago, just over 3% of the shares were ‘held short’. This number has since climbed to 9.4% of total floated shares. The fact that institutional investors are betting on the stock falling doesn’t fill me with confidence.
In my opinion, the risks for the Cineworld share price outweigh the positives. The Omicron variant poses a large risk to the wider retail leisure sector. In addition to this, poor results coupled with large debts worry me. Although the shares do look cheap, I’m not willing to take the risk for my portfolio just yet.
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Dylan Hood 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.