Cineworld (LSE: CINE) shares were hit hard during the pandemic. With lockdowns enforced across the globe, the cinema chain was forced to shut its doors for months. As a consequence, the shares fell over 70% in 2020. So far, the picture in 2022 isn’t much better – the shares are down 16% in the last 30 days and over 6% year-to-date.

However, the world is steadily recovering from the pandemic, and consequently, cinema footfall is steadily increasing. This could help Cineworld rebuild its revenues and meet its heavy debt obligations. Therefore, could now be the perfect time for me to stock up on some cheap shares? Let’s take a closer look.

A good buy?

Although the current share price may not reflect it, I do see a number of positives for Cineworld shares. Firstly, it has just undertaken a massive marketing push to try and draw in consumers. Part of this has entailed cutting its prices to £3 per cinema entry, which seems like a great strategy to harness the increased footfall, and set itself aside from the competition. This growth has been supported by a number of high-grossing movies released in 2022, for example, Spider-Man: No Way Home, which was the first film to gross over $1.5bn at the box office since the Covid-19 pandemic.

In addition to this, the most recent trading update — for the six months up to 31 December — reported that group revenues had reached 88% of 2019 levels. This was a huge increase from the 50% reported in July 2021. More specifically, revenues in the US, Cineworld’s largest market, reached 91% of 2019 levels, highlighting an impressive recovery.

Obviously, the shares look cheap. But when comparing them to competition is where I see the real value. Cineworld currently trades on a mere 2.07 forward price-to-earnings ratio. Cineplex, its big competitor, trades on a forward P/E ratio of 33.4. This highlights the massive value that Cineworld shares offer.

Headwinds for Cineworld shares

While Cineworld shares look cheap, there are still some serious risks ahead of the firm.

The firm is still embroiled with a legal battle with its competitor Cineplex after the Ontario Superior Court ordered it to pay over £700m in damages in December 2021. This was mainly due to Cineworld withdrawing from a proposed takeover deal with Cineplex. After the announcement of this news, the shares fell 39% the next day. If the firm loses this battle, who’s to say the shares won’t fall by this magnitude again?

Losing this battle would also add to the enormous debt pile. In my opinion, this is something the firm’s balance sheet simply cannot afford. A primary reason for this is rising interest rates across the world, which will significantly magnify its debts.

The verdict

Overall, I am not comfortable buying Cineworld shares for my portfolio. While the shares are very cheap, I think this is because investors are realising the tough headwinds that Cineworld has ahead of it. In my opinion, it will take time for the firm to overcome these, and hence I will be steering clear in the meantime.

The post Cineworld shares are falling: should I buy now? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

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.

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.

The Verdict

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.

The post Should I buy the Cineworld share price dip? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

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.