Advisors in Focus- March 11, 2021

When was the last time you were in a movie theater?

The global pandemic devastated the movie business. Consumers cringe at the idea of paying $15 dollars to sit in an enclosed setting for two hours. 

The rise of streaming makes matters worse. “Straight to video” went from a punchline to a viable strategy to bolster subscriptions. Tent pole movies like Godzilla vs. Kong? They were all pushed to 2021 and 2022. 

So why would  AMC Theaters (AMC) stock be up 395% in this environment? 

The reason is simple- the retail army targeted this name for a short squeeze. TrackStar data reflects this interest. AMC ranked as the top searched stock by retail two weeks in a row (#2 three weeks ago).

Advisors in Focus dives into AMC. We will provide you information from its earnings release to see if it is a name you want in your client’s portfolio.

TrackStarIQ Data

Here are some highlights from retail searches the past three weeks –

RankTOP STOCKS – BY RETAIL (Total Traffic) Last WeekTickerTOP STOCKS- BY RETAIL (Total Traffic) Prior WeekTickerTOP STOCKS BY RETAIL (Total Traffic) Three Weeks Ago Ticker
1AMC Entertainment Holdings IncAMCAMC Entertainment Holdings IncAMCTesla IncTSLA
2Gamestop CorpGMETesla IncTSLAAMC Entertainment Holdings IncAMC
3Tesla IncTSLANio IncNIOBionano Genomics IncBNGO
4Apple IncAAPLSOS LtdSOSGamestop CorpGME
6Nio IncNIORocket Companies Inc Cl ARKTChurchill Capital IV Cl ACCIV
7Second SightEYESGamestop CorpGMEAlibaba Group HoldingBABA
8Exela Technologies IncXELAOcugen IncOCGNTesla IncTSLA
9Palantir Technologies Inc Cl APLTRPalantir Technologies Inc Cl APLTRApple IncAAPL
10Ocugen IncOCGNChurchill Capital IV Cl ACCIVOcugen IncOCGN
11Sundial Growers IncSNDLKemPharm, Inc.KMPHPalantir Technologies Inc Cl APLTR
12Castor Maritime IncCSTMCastor Maritime IncCSTMGevo IncGEVO
13Zomedica Pharmaceuticals IncAMZNSOS LtdSOS
14Rocket Companies Inc Cl ARKTSundial Growers IncSNDLPalantir Technologies Inc Cl APLTR IncAMZNSecond SightEYESAerocentury CorpACY
16Churchill Capital IV Cl ACCIVZomedica Pharmaceuticals CorpZOMWorkhorse GrpWKHS
17Enveric Biosciences IncENVBWorkhorse IncAMZN
18Visa IncVSquareSQQQNio IncNIO
19Opgen IncOPGNGevo IncGEVOfuboTV IncFUBO
20Nvidia CorpNVDAAT&T IncTOcugen IncOCGN

Price action in AMC startled market participants in late January. Shares rallied 900% from $2.18 cents on January 15 to $20.36 on January 29. Welcome to the world of short squeezes. 

One can argue the re-opening trade. To be fair, there is merit to the argument. The vaccine inspires confidence to return to the theaters. A delayed release schedule bolsters the number of blockbusters in 2021. 

On its earnings conference call, AMC said that 2021 “is already proving to be a much brighter story”. The first week of March posted the strongest traffic since March of 2020.  Key markets- New York and San Francisco- re-opened and provide a boost to results. A third major market, Los Angeles, opens in two weeks. It drove home the idea that pent-up demand exists.

The ability to win the hearts of moviegoers back is key. It developed a partnership with Clorox (CLX) and Harvard University’s School of Public Health. AMC states that 17 million people returned to theaters since the re-opening. There are no reported COVID cases from these visitors. The campaign to establish safety is in full swing.

Time will tell if the “return to the theater” campaign can triumph.

So how were the Q4 results?

Revenues beat analyst expectations. AMC reported revenue of $162.5 million compared to S&P Capital IQ consensus expectations of $141.3 million. Great right? Well, revenues fell 89% on a year-over-year basis. Not so great.

Over 8 million people went to the movies in the fourth quarter. That figure was down 91% from the prior-year period. U.S. attendance fell 92% compared to a decline of 89% in International markets. Not great but linearity comments, the path of the attendance numbers, improved.

Earnings? Avert your eyes… AMC reported a net loss of $946 million or $3.15 per share, two cents worse than the S&P Cap IQ expectations. Adjusted EBITDA- which represents earnings before the impact of interest expense, taxes, and depreciation- was a loss of $327 million. Free Cash Flow? A burn rate of $375 million.

And the balance sheet?

The key for investors remains the balance sheet. Can it weather the storm?  AMC remains in compliance with its financial covenants. It has suspended all shareholder return plans so no dividend or share buybacks. It is working with its landlords on reducing expenses.

Since the start of the pandemic, the company has raised a total of $2.2 billion of gross debt and equity capital. It secured more than $1.6 billion of creditor and landlord concessions. AMC has $1.1 billion cash on hand. It did say during the call that it would ‘carefully examine the raising of additional capital in whatever form we think is most attractive”.

A red flag for investors is the at-the-market (“ATM”) offerings. This means that AMC uses its stock to raise capital over time. The first one launched in September (15 million shares). In October AMC did an additional 15 million shares; November 20 million; December 200 million; and January another 50 million shares. 

AMC’s total equity raise is $869 million before commission and fees. This kept the lights on but increased the share count and the float. So, in order for the stock to go higher, you need more buyers. AMCs float stands at 450 million shares compared to 285 million before the equity raises.

The company has $450 million in deferred rent with an average repayment term of 27 months. 

AMC released its outlook for 20201 cash burn. The first half should see a burn rate similar to January and February, Q3 cash burn of approximately $150 million. Q4 it expects to be cash flow breakeven. AMC said its cash interest payments for 2021 will be around $165 million. 

The math for free cash flow and its debt and interest payments is cause for concern.

Lightshed Partners’ Rich Greenfield placed a $0.01 price target on the name. Mr. Greenfield noted that AMC’s balance sheet leverage and free cash flow generation raise concerns. He stated that AMC generated $779 million in EBITDA before the pandemic. He does not see a return to those levels in the current environment. Even if they did, it would be difficult to pay down debt. 

The retail investor remains enamored with shares of AMC. We are curious to see how it trades. If you trade it,  definitely differentiate between trading and investing. The re-opening trade provides a good story. The idea that movie theaters have weathered the storm and the moviegoers shall return makes for a movie-type ending. That balance sheet looks more like a horror show than a romcom. 

On its call, it noted that the zeitgeist of America would support the movie. This may be true. We would prefer a solid balance sheet to provide the support. 

If your clients ask about AMC, think of these questions:

  • Did AMC improve its balance sheet?
  • Will the company take further dilutive action to raise equity?
  • Is the debt load manageable?
  • What will the future of movie releases look like?
  • Did streaming kill the movie star?

A quick addition. AMC was asked about the Reddit traders on its call. Management really can not comment in-depth on the issue. CEO Adam Aron made this statement on the earnings call:

“And finally, a quick comment on the so-called Reddit rally. Our focus has been on managing our business and directing its recovery. It’s not — it’s really not appropriate to say much more here on this earnings call. It’s probably notable to point out that of the more than $2.2 billion of cash will be raised between April of 2020 and now, about 99% of that cash, ironically came in before the Reddit rally. But as I look at all those retail investors, I realize and truly take the heart, one thing among others, how 101-year-old AMC is a crucial part of the American zeitgeist. Many Americans have a strong affection for AMC. They’ve been going to our movie theaters for years and years or for decades and decades. And we intend to get many of these people to very soon be ticket buyers at our AMC theaters once again”.  

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