Shares of AMC Leisure (NYSE:AMC) skyrocketed 160.4% in Might, in response to knowledge from S&P Global Market Intelligence. The most important movie show firm on the earth turned the most recent poster baby of meme inventory mania, as Reddit message board WallStreetBets fueled a large spike on this beaten-down, extremely shorted inventory because the economic system inched nearer to a full reopening.
The large transfer got here regardless of a primary quarter earnings report exhibiting an enormous money burn of $325 million, extra dilutive fairness gross sales to maintain itself afloat, and the corporate’s largest shareholder for the previous 9 years promoting its whole stake.
With all of that occurring, you might need anticipated the inventory to go down. However in fact, that is 2021, the 12 months of the meme inventory! So what the heck is happening?
Whereas AMC did report substantial first quarter money burn initially of the month, its U.S. theaters had been solely working at 15% to 60% capability within the March quarter, and solely 27% of worldwide theaters had been open, additionally at restricted capability. With vaccinations accelerating sooner than thought since March, reopening optimism apparently reignited the WallStreetBets message board on Reddit, as a result of AMC’s inventory started appreciating shortly after earnings.
On Might 13, just a few days after earnings, AMC offered one other 43 million shares for $428 million, at almost $10 per share. Provided that the corporate had offered shares within the low-single digits final fall and winter, promoting shares at $10 could have appeared like an important deal… if solely administration knew what was coming!
Within the wake of the fairness elevate, sell-side analysts at B. Riley upgraded the inventory, saying the elevate probably lessened the necessity for extra capital forward of an business restoration. Whereas that bullish name bolstered the inventory additional, B. Riley solely raised its worth goal from $13 to $16 — lower than half of the place shares commerce now.
Then, because the inventory climbed towards $12, Dalian Wanda, the Chinese language group that had initially bought AMC in 2012, offered all of its remaining shares on Might 21. Whereas most would take that as a vastly bearish signal, the inventory inexplicably went on an infinite tear instantly thereafter, greater than doubling to $26 per share by the tip of the month.
Why did that occur? It is arduous to say. On Might 26, sell-side agency CFRA upgraded AMC, however solely from “Promote” to “Impartial” and giving an $18 worth goal. That coincided with the hashtag “#AMCSTRONG” trending on Twitter. The inventory rallied about 20% that day, and continued to rise via the tip of the month. A short squeeze probably performed into issues, as almost 20% of shares excellent had been offered brief heading into Might.
The inventory’s rise has continued into June, together with extra capital raises. On June 1, the corporate raised $230.5 million at $27.12 per share from hedge fund Murdick Capital. The inventory surged 20% on the information, and Murdick offered all of its stake that very same day, telling purchasers shares had been “massively overvalued,” in response to Bloomberg.
Murdick had additionally owned AMC’s debt, probably at distressed costs, so the fairness elevate could have been a ploy to extend the worth of its debt by rising AMC’s creditworthiness. Though a savvy commerce by Murdick, it apparently offered too early as properly, as AMC’s shares skyrocketed over 100% the following day, reaching a excessive of $72.62, and prompting buying and selling halts. Extremely, AMC was allowed to promote one other 11.5 million extra shares to the general public the next day at $50.85 per share, elevating a whopping $587.4 million whereas solely minimally diluting shareholders. Shares ended final week at $47.91.
All in all, AMC has raised $1.246 billion this quarter, including to the $813.1 million in money it had on the finish of the primary quarter. The corporate remains to be probably burning via money, so it probably has rather less than $2 billion in money in opposition to a still-high $5.46 billion in debt — and a few of that at very excessive rates of interest. The corporate’s share rely has additionally almost quintupled from pre-pandemic ranges to 502 million shares excellent.
Paradoxically, with buyers bidding up the inventory and the corporate promoting shares, probably properly above intrinsic value, AMC has probably fended off chapter for the foreseeable future and truly elevated the intrinsic worth of the corporate. As an illustration, if an organization is basically value $1, however is ready to promote shares at $10, as an instance, doubling its share rely, it will increase the corporate’s intrinsic worth from $1 to $6 ($1 plus $5 per share in money).
The issue? It is nonetheless value $6 — lower than the $10 worth at which buyers purchased shares. Paradoxically, the extra shares the corporate sells above intrinsic worth, the nearer intrinsic worth will transfer towards the sale worth, however it would by no means exceed that worth.
The large exception to that rule is that if the corporate can use that money to make high-return investments that may improve intrinsic worth going ahead. That can be potential, as CEO Adam Aron mentioned on the Murdick capital announcement that “it was time for AMC to go on offense once more,” saying AMC is pursuing the high-end deluxe theater chain Arclight Cinemas in California, which went bankrupt this 12 months because of the pandemic, in addition to different “extremely enticing theater alternatives.”
So if AMC offered shares at excessive costs, and may then purchase high-quality theaters at discount costs, and if movie-going bounces again in a giant approach, it might the truth is create worth above the place the corporate offered shares.
Nonetheless, that also looks as if a protracted shot. In 2019, earlier than the pandemic, AMC reported “adjusted” free cash flow of $358 million — and that determine included some beneficiant changes. Nonetheless, assuming AMC can get again to its prior free money circulate on the brand new quintupled share rely, that is solely about $0.71 per share. So, on the present inventory worth, shares are valued at 67.5 occasions 2019 adjusted free money circulate per share.
After all, film theaters weren’t precisely a development business previous to COVID, and will very properly wrestle to totally bounce again. Studios are shortening the window for theater exclusivity, and a few could even start releasing titles on to streaming providers along with theater releases.
Whereas accretive theater acquisitions might add worth, I doubt any acquisitions would materially improve AMC’s free money circulate, since AMC already has large scale as the biggest theater chain on the earth.
Principally, shares appear massively overvalued from a basic standpoint, and the inventory is extraordinarily dangerous at these ranges. That does not imply buyers cannot generate income on technical shopping for bursts like we have seen over the previous month, however that is not likely investing; it is subscribing to the greater fool theory.
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 one among our personal — helps us all suppose critically about investing and make choices that assist us grow to be smarter, happier, and richer.