Image source: Getty Images
Fate has had no shortage of twists and turns lately Cinema world (LSE: FILM). Just yesterday, Cineworld’s share price jumped 25%.
However, even after the sharp price increase, the stock has lost more than 90% of its value over the past year. A stock price chart is not a pretty sight.
Does yesterday’s jump indicate that this stock could be a bargain for my portfolio hidden in plain sight?
How to evaluate shares
In short, I don’t think so.
A bargain is something I can buy for less than it costs. Cineworld shares are changing hands for pennies at the moment. But that alone isn’t enough for me to consider them a bargain. Instead, I need to compare the price to what I think the company is worth.
It is not always easy to make a decision how to value stocks. But one thing we do know about Cineworld is that it is under a huge pile of debt. It ended last year with $8.9 billion in net debt. This matters because if a company needs to use its earnings to service debt, it cannot finance dividends. Cineworld’s dividend remains suspended and I expect it to remain so for the foreseeable future.
But what if the business doesn’t even make enough money to service its debts? This can lead to bankruptcy. In addition, he can negotiate with his creditors to come to an alternative arrangement. For example, it could dilute existing shareholders to issue new equity in exchange for reducing debt. This is exactly what is being worked on recently.
So, while it’s hard to determine the value of Cineworld shares, I think there’s a good chance they’ll end up worth nothing or close to it. Restructuring so much debt could wipe out existing shareholders.
Cineworld’s share price is soaring
So why did Cineworld’s share price jump by a quarter yesterday?
I think there are several possible explanations. Some investors may expect lenders to sweeten the restructuring deal in a way that doesn’t completely wipe out existing shareholders. Speculators can also view Cineworld as a meme stock, like a movie theater chain AMC was before that.
On top of that, I believe the fundamentals of Cineworld’s business remain attractive: it has thousands of screens worldwide and its cinema audience will continue to recover. The question is less about the core business and more about it balance.
Are stocks a bargain?
However, this balance worries me. It also complicates the valuation of Cineworld shares.
Therefore, their purchase seems to me to be a speculation, not an investment. The long-term trend in Cineworld’s share price has been disastrous. Despite yesterday’s jump, I think the stock could still go down to zero. I don’t see them as a bargain and in fact fear that even if they sell for pennies they can still be a value trap. I will not be adding them to my portfolio.