Whenever I have covered the Cineworld (LSE: CINE) share price over the past year or so, I have always tried to make it clear that it could be several years before the company can return to 2019 levels of profitability.
The pandemic decimated the group and left a scar on its balance sheet. Debt ballooned as the company tried to stay afloat and stave off complete collapse.
Now management faces the difficult task of revitalising the organisation against an uncertain economic backdrop. There is also the risk that interest rates will increase over the next year. This could increase the cost of the company’s debt, adding yet another challenge for Cineworld to overcome.
However, if I put these risks to the side for the moment and focus on what the corporation could be worth five years from now, it becomes clear to me that this business has potential.
Cineworld share price outlook
As it has only been a few months since the economy fully reopened after the pandemic, I think it is still too early to make any concrete conclusions on how coronavirus has shaped consumer trends.
That said, initial indications appear to show that consumers are returning to cinemas. This is good news for Cineworld, which used the pandemic to revitalise many of its theatres. The goal of this initiative is to encourage consumers to spend more. It seems as if this is working.
The company’s latest trading updates explain that consumer concessions spending, as well as tickets, is robust. And Cineworld will need consumers to splurge if it is to return to growth.
City analysts think the company has the potential to earn a small net profit of $28m (£21m) for the 2022 financial year. That is assuming there are no more lockdowns or unforeseen economic developments.
If the company hits this target, it can start chipping away at its mountainous £6.2bn debt pile. This will create a virtuous cycle. As Cineworld reduces debt, interest costs may fall, freeing up more cash to reduce debt further.
There are other levers the corporation can pull to reduce borrowing. These include a US listing and rights issue. Either of these would accelerate the company’s recovery.
Valuation potential
Assuming there are no unforeseen developments, I do not think it is unreasonable to suggest that Cineworld could return to 2019 levels of profitability within the next five years.
In 2019, the company reported earnings per share of 9.6p. Historically, the stock has traded at a multiple of around 15 times earnings. Based on these numbers, I think the shares could climb to a value of about 144p within the next half-decade.
These are just projections at this stage. There is plenty that could go wrong between now and 2026, which could destabilise the company’s recovery. But one thing is for certain. This stock is not suitable for all investors.
And with that in mind, I am not going to buy the shares for my portfolio, despite their potential. I think there is just too much that can go wrong over the next few years.
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.
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