Over the previous yr, the long-lasting theater chain AMC Leisure Holdings (NYSE:AMC) has received over the hearts and souls of WallStreetBets merchants. On Wednesday, its shares skyrocketed one other 95.6% after the corporate introduced it could launch an unique net platform for retail buyers. Shareholders would obtain many perks, together with free popcorn, unique new screenings, and the possibility to talk with CEO Adam Aron.
Enthusiasm about AMC’s turnaround prospects have despatched its shares hovering greater than 400% up to now month and a pair of,100% yr thus far. Is the inventory a protected funding proper now?
What’s behind the hype?
Through the first quarter of 2021, AMC operated 585 of its home theaters at simply 15% to 60% capability, whereas solely 27% of its 133 worldwide ones stayed partly open. Folks steered away from packed indoor film screenings with the coronavirus pandemic nonetheless going robust, however that is much less of a threat as extra of the U.S. inhabitants has been vaccinated.
Therefore, buyers are betting that AMC’s income and earnings will expertise a large rebound beginning within the second quarter. In 2019, the corporate generated $5.42 billion from ticket, concessions (meals and beverage), and leisure gross sales and posted a free money circulation of $84 million.
However there’s extra. The pandemic additionally led to prolonged manufacturing delays, as social distancing may be tough on a film set. Many producers additionally didn’t wish to launch accomplished movies in a purely digital format and miss out on profitable field workplace income.
There may be now a large backlog of latest movies from blockbuster franchise properties akin to Avatar, Dungeons & Dragons, Ghostbusters, Halloween, Kingsman, The Matrix, Minecraft, Mission: Not possible, and Tomb Raider, in addition to a number of new choices from the comedian guide universes of DC and Marvel. They’re all scheduled to be launched by the tip of 2022.
The schedule is so packed that distinguished movies like Black Widow and Cinderella are set to hit theaters inside two weeks of each other in July. Given its sheer measurement, AMC may even see its field workplace income hit report highs in 2022.
Are you able to depend on AMC?
Usually talking, most buyers have a tendency to purchase on emotion and justify with cause. Now might be time to have a look at the latter. When the inventory was buying and selling for simply $12 final month, it seemed fairly undervalued.
Nevertheless, issues have modified as AMC’s market cap has surged to almost $25 billion. To place issues into perspective, the corporate’s market cap was lower than one-fifth of that quantity in 2016, earlier than streaming providers like Netflix gained momentum and took away a few of its market share.
What’s extra, AMC has $5.4 billion in long-term debt and owes $4.9 billion per yr in theater lease. Even in its heyday, the corporate operated at razor-thin margins. Now its stability sheet appears even worse as liabilities outpace its belongings by over $2 billion. For these causes, it is in all probability a very good time to take income on the inventory and consolidate features.
However look ahead to its subsequent transfer
Based mostly on the poor fundamentals (and expertise with market bubbles), it may be very tempting to see the latest rally as nothing greater than a pump-and-dump scheme or a complete rip-off. However there’s something that even prudent buyers are lacking.
With a $25 billion market cap, AMC solely has to challenge 22% extra shares to lift money to repay its complete debt stability. That is proper: The corporate has the potential to do a “smooth reset” and begin afresh. The returns could be speedy, as after closing, it could not should pay $151.5 million per quarter in curiosity. Within the first quarter of 2021, the corporate’s curiosity expense outweighed its complete income.
Not solely would its revenue margins improve, but it surely may additionally use new money to extend its theater depend, improve its recliner seats and massive screens, introduce dine-in eating places at its places, and extra. Since there may be nonetheless lots of demand from retail buyers at these ranges, I do not suppose it could have hassle discovering consumers for the providing, both.
Actually, the corporate did simply that on June 3. AMC bought 11.5 million shares of inventory hours after saying the providing, elevating $587.4 million in much-needed money. The inventory fell by greater than 30% from the day before today’s shut earlier than recovering. Buyers ought to proceed to count on additional dilutions forward, as the brand new capital continues to be not sufficient for a smooth reset of its liabilities.
Total, AMC inventory could be very overvalued at these ranges. However due to the assistance of 10.3 million merchants/followers/influencers of WallStreetBets, the corporate now has the choice to refinance or remove its crippling liabilities. If the share value comes all the way down to one thing extra affordable (say, $20), I might positively give the brand new AMC an opportunity. For now, try these alternatives as an alternative.
This text represents the opinion of the author, who could disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even certainly one of our personal — helps us all suppose critically about investing and make selections that assist us turn into smarter, happier, and richer.