Retail merchants are as soon as once more pouring into closely shorted shares to trigger short squeezes, and AMC Leisure (NYSE:AMC) is considered one of their fundamental targets. Shares on this embattled movie theater operator have risen by a jaw-dropping 333% up to now in 2021.
However is that this value rally based mostly on fundamentals or unsustainable hype? Let’s dig deeper to search out out.
What’s behind the current rally?
Buying and selling at $9.18 on the time of writing, shares in AMC Leisure are up in worth by greater than 50% in simply over per week. The transfer coincides with a rally in GameStop stock, which has additionally loved a surge in shopping for.
In response to analysis from cybersecurity agency PiiQ Media, these strikes might have been triggered by social media bots. However AMC additionally enjoys some basic tailwinds that might assist justify the elevated inventory value.
The U.S. authorities is vaccinating over 2 million Individuals per day in opposition to COVID-19. In response to CNN, the nation may attain herd immunity by June due to vaccinations and the pure defenses that beforehand contaminated individuals have developed. This pattern is nice information for AMC Leisure, which depends on individuals visiting its theaters to generate income.
Third-quarter income fell 91% to $120 million due to a collapse in ticket purchases and meals gross sales. However that is all-time low, and issues will seemingly enhance from right here.
Main markets like New York Metropolis are additionally stress-free restrictions (AMC might be partially reopening all 13 of its Large Apple places beginning March 5). And in response to the Nationwide Affiliation of Theater House owners, this transfer “offers confidence to movie distributors in setting and holding their theatrical launch dates, and is a crucial step within the restoration of all the trade.”
AMC nonetheless faces challenges
However the anticipated restoration within the theater trade does not essentially make AMC shares an excellent purchase — and neither does its valuation. With a price-to-sales a number of of simply 0.3, the inventory seems low cost in comparison with the S&P 500‘s common of two.8, however that valuation metric solely tells a part of the story.
The coronavirus pandemic has left the corporate’s steadiness sheet in shambles.
Most just lately, AMC raised $917 million in new debt and fairness, which can enhance the variety of shares excellent by 165 million (for $506 million in money) and add a whopping $411 million to its debt load, which stood at $5.8 billion as of the third quarter. The potential for rising curiosity expense and debt amortization will strain AMC’s money stream over the long run and lift the chance of future capital raises that might dilute present buyers.
AMC just isn’t a purchase
AMC Leisure stands to learn from the winding down of the coronavirus pandemic and easing restrictions on its theaters. However the future remains to be removed from sure. We do not know the way lengthy it would take for the trade to get well (if it ever does). And AMC might not generate sufficient money stream to handle its debt with out counting on fairness dilution to plug the hole. Traders ought to keep away from the inventory till the corporate addresses these challenges.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even considered one of our personal — helps us all suppose critically about investing and make choices that assist us change into smarter, happier, and richer.