Is penny stock Cineworld a cheap buy at under 5p?

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Weighed down by an enormous debt pile, Cineworld (LSE: CINE) shares have been in penny stock territory for over two years now. In fact, that’s something of an understatement. The Cineworld share price has plummeted to 4.21p today from previous highs over 300p. That’s a horrific 98% fall over the past half-decade.

So, does the massive decline mean the shares are now a bargain or a value trap?

Here’s my take on the outlook for this troubled stock.

Disaster movie

The reasons behind Cineworld’s disastrous performance are well-documented. But to recap, the already-debt-laden cinema group was forced to close its locations during the pandemic. This dealt a severe blow to the share price. Ever since the return to the big screen, the company’s struggled for survival with a decimated balance sheet.

In September 2022, the business filed for Chapter 11 bankruptcy protection in the US. This is a court-supervised restructuring process that gives the group time to negotiate with creditors to reach a settlement on debt reduction terms. The company expects to emerge from this process in Q1.

What’s more, Chief Executive Mooky Greidinger was recently fined and handed a suspended six-month prison sentence in Israel. The court found he was indirectly responsible for failing to prevent the breach of a 2010 merger agreement between Cineworld’s Israeli subsidiary and another Israeli company called Matalon.

A cliff-hanger ending?

Still burdened by its £4bn debt pile, is there any way Cineworld can rebuild its business?

The embattled company has ruled out selling off its assets individually. It has, however, reached out to 30 potential buyers for the group as a whole. Despite recent talks not coming to fruition, competitor AMC Entertainment, which owns Odeon cinemas, had shown an interest in the proposed fire sale.

A takeover might be good news for the Cineworld share price, but that’s not guaranteed and much will depend on the exact terms. Indeed, the company has issued a stark warning to investors.

Any restructuring or sale transaction agreed with stakeholders will result in a very significant dilution of existing equity interests in Cineworld… there is no guarantee of any recovery for holders of Cineworld’s existing equity interests”.

With the very real prospect of the share price heading to zero, I’m sorry to say this penny stock looks more like a gamble to me than a credible investment proposition.

The company has previously lamented its failure to become a ‘meme’ stock like its rival AMC or Bed, Bath & Beyond, which skyrocketed as much as 120% in yesterday’s trading frenzy.

There’s always the possibility Cineworld shares might attain such status. But this could translate into extreme share price volatility, leading to huge short-term gains and losses. I’m uncomfortable taking on that level of risk.

Would I buy Cineworld shares?

I’m a long-term investor. The prospects for the Cineworld share price look dire to me when taking the long view, so I’m running a mile from this company.

Sure, the stock could be pumped up with help from a Reddit crowd of retail traders. Some might get lucky. Many could be left with investments that end up worthless.

I’d rather invest in quality businesses with strong fundamentals. In that respect, Cineworld shares don’t fit the bill for me.

The post Is penny stock Cineworld a cheap buy at under 5p? appeared first on The Motley Fool UK.

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Charlie Carman 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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