Under the Spotlight Wall St: AMC Entertainment Holdings (AMC)

Cinema has been around for more than a hundred years and so has one of its biggest brands. Founded in 1920 by the Dubinsky brothers, AMC is a film heavyweight that has won hearts and minds of viewers worldwide. Not only that, but despite more than a century of history, AMC has always been a front-runner in industry innovation.

If you think the only innovations in cinema are limited to CGI and 3D, think again. Many things we take for granted in the movie experience were either designed by AMC or adopted early by it. Multiplexes with different simultaneous screenings? AMC invented it in 1962. Cupholder armrests? Yup, AMC was one of the first chains to implement those in 1981. Stadium seating so tall people on the front seats wouldn’t blind shorties behind them? You guessed it, AMC in 1995.

With such distinct innovations, a century old tradition, and over 10,000 screens around the world, it isn’t any wonder that AMC would grow to become one of North America’s most beloved movie chains.

The Fall

But despite all of this innovation, the 2000s have not been kind to AMC. Box office tickets have been falling for over a decade. In 2019, the number of tickets sold at the box office in the U.S. was down -22% from an all-time high of 1.6 billion in 2002. Still, the worst was yet to come. The pandemic saw cinemas worldwide shut their doors, and for AMC that meant a revenue plunge from US$942m in the Q1 2020 to a meagre US$19m in Q2.

With more than US$10b in net debt and almost no revenue, the outlook for the company’s future was grim. AMC even stated in June 2020 that it had “substantial doubt” it would be able to remain in business. The company’s Q3 result wouldn’t be much better. Even though revenue increased tenfold, it only amounted to US$119.5m, nowhere near what it needed to cover its short-term liabilities. By October 2020, the company reported that its existing cash resources “would be largely depleted by the end of 2020 or early 2021”, facing the risk of bankruptcy.

The Precedent Setter

In early 2019, former financial analyst Keith Gill invested US$53,000 in GameStop ($GME) call options expiring in late 2021 and shared his investment thesis on Wall Street Bets (WSB). Analysing the company’s cash flow statements and balance sheets, he thought the stock was undervalued, oversold, and that fears of it going bankrupt were overplayed. He referred to it as a “cigar butt”: a company that might not last long, but that would still be able to provide some nice last puffs.

Gill’s investment thesis was a social media phenomenon and brought about an explosive GME short squeeze and some would say the reincarnation of AMC.

From The Ashes

Not having caught the GameStop craze before the stock had risen dramatically in value, some investors felt like they had missed out on the party and looked for other companies that could face the same destiny. Noticing that AMC had a short interest of over 180% at that moment (which means that through fancy financial derivatives, there are more investors willing to bet on the stock’s downfall than there are outstanding shares), it seemed like the perfect candidate for a short squeeze that could achieve similar returns to GameStop’s.

So when on January 26, AMC announced that it had secured US$917m in new capital to avoid bankruptcy at least through the end of 2021, the WSB community went into overdrive, sending the AMC stock price soaring +310% overnight. The rally would continue until June 2021, when shares reached their all-time high of US$72.62, a return of +1,364% on its value of US$4.96 on 26 January 2021. 

By raising new capital, the company was able to deleverage itself from US$11b in net debt to just  US$9.5b. Its most expensive liabilities have been paid off too, lowering AMC’s effective interest rate on debt from 5.81% annually to 3.40% despite the rise in interest rates across the globe. With a big war chest, board members felt encouraged to take more risks and make bolder investments.

Riding The Hype

Innovation is nothing new for AMC’s company culture, and by late 2021, the company decided to join aboard the crypto craze that reigned at that time. In September, the company announced it would accept Bitcoin, Ethereum, Litecoin and Bitcoin Cash as a form of payment on its cinemas and by December 2021 it was offering free NFTs for its shareholders.

Crypto wasn’t the only asset class that AMC was buying. In March 2022, the company announced it would buy 22% of Hycroft Mining ($HYMC), a struggling silver and gold mining company, for US$28m. Some pointed out that the move was irresponsible, considering the firm’s multi billion dollar debt, whereas others applauded AMC CEO Adam Aron’s move, which stated that the company is looking for more “transformational deals” that could be made through the company’s US$1.8b war chest.

It hasn’t stopped there, with the company revealing its intention to give investors a special dividend. The Preferred Equity Unit stock split will list on the New York Stock Exchange under the symbol $APE. CEO Adam Aron said that the move was a major step forward for the company, and in his view one of the most favourable developments by AMC in 2022. It’s an unique scenario and one that is being closely watched by the markets.

What’s Next?

Even if the Hycroft purchase raised eyebrows, AMC’s financials are undoubtedly improving. During Q2 2022, the company’s revenue grew to US$1.2b from US$445m in Q2 2021 . Net losses improved to US$121.6m, whereas in 2021 the company had a net loss of US$344m.

EBITDA also rose, reaching a positive US$107m compared to a loss of US$151m for the Q2 2021. And screening attendance is also gaining traction, as in Q2 2022, AMC had 59m people at its theatres globally, up 168% year-on-year. Whether that will be good enough to sustain the stock’s growth or if its acquisitions loftiness will be its latest demise remains to be seen.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.