Sunday, May 16

AMC Entertainment Holdings Still Overvalued?


AMC Entertainment Holdings stock (NYSE: AMC) has increased almost 3.5x from its April 2020 lows. AMC Entertainment Holdings – the biggest movie theater chain – has the largest share of the US theater market, ahead of Regal and Cinemark Holdings. AMC stock increased from $2.10 to $8.50 off its recent bottom, compared to the S&P 500 which has recovered over 75% from its recent lows. Over recent weeks the stock saw intense short squeezing activity which took it to almost $20 levels. The stock has since fallen back to $8.50 over the last few weeks. Despite a healthy rise and volatility over recent months, even at the current level the stock is still down more than 40% from its December 2017 level. However, we believe that the stock is currently extremely overvalued and is likely to see a major drop in the near term, as the company faces a huge debt burden, with bankruptcy being avoided only as of now. Even if it looks like the company will survive the pandemic for now, factors such as disruption caused by streaming, studios looking for ways to survive without theaters, and the possibility of the company falling into a further debt trap while seeking growth and survival, will drive the stock down. Our dashboard What Factors Drove 43% Change In AMC Entertainment Holdings Stock Between 2017 And Now? has the key numbers behind our thinking.

The stock price decline between 2017 and 2019 was driven by the sharp drop in the P/S multiple. AMC’s revenues increased 7.7% from $5.1 billion in 2017 to $5.5 billion in 2019. Lower share count also meant that revenue per share increased 33% from $39.62 to $52.84 during this period. Despite healthy growth in revenues, the P/S multiple dropped 65% from 0.46x in 2017 to 0.16x in 2019. This was mainly due to volatility in earnings, with the company reporting losses in 2019, and a rising debt burden putting strain on margins and the balance sheet. The multiple crashed in 2020 following the outbreak of the pandemic and has recovered over recent months, as it now stands at its 2019 level of 0.16x. We believe uncertainty surrounding the industry and AMC’s fundamentals will likely keep the P/S multiple down in the near term.

Where is the stock headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which led to shutting down of movie theaters for months together. Shutdown along with lower consumer spending took a huge toll on the movie theater industry, which was reflected in the Q2 and Q3 2020 results of these companies. AMC’s revenues saw almost a complete washout in Q2 and Q3 2020, with y-o-y revenue decline being 99% and 91% in these two quarters, respectively.

However, there have been signs of lifting of the global lockdowns over recent months. As the global economy opens up and lockdowns are lifted in phases, consumer demand is slowly picking up. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With lifting of lockdowns, AMC opened a couple of its theaters in January 2021 and a few more in February. However, it will be operating at a very low occupancy limit (example: 25% occupancy limit in Illinois).

With investors’ focus having shifted to 2021 and beyond, ideally the stock should be doing well considering the gradual reopening of theaters. But that is not the case with AMC. Management had warned in October 2020 that the company could declare bankruptcy in early 2021. In December 2020, its own lenders suggested bankruptcy as an option, as the company is dealing with the pandemic with nearly $6 billion in debt. Additionally, to raise more cash the company is also relying on issuing more shares. Since Q3 2020 (when it had 107 million shares outstanding), AMC’s share count grew to 137 million in October 2020, and in December alone it filed to sell more shares. However, bankruptcy fears have been staved off for the moment following the $917 million cash infusion in the company ($506 million from equity issuance in December 2020 and $411 million from debt raised from its European subsidiary Odeon). An additional 164.7 million shares issued recently to avert bankruptcy are expected to dilute the earnings of its existing shareholders. Also, the previous latest debt that the company raised in January 2021 was at an interest rate of 15%, signifying the strain its earnings will face in the coming quarters. With most of the top studios having their own streaming business, the dynamics of the industry are changing, with studios expected to be less dependent on theaters for their growth going forward. Thus, the streaming boom is also adversely affecting AMC’s business. To summarize, though theaters are opening, factors such as high debt burden, rising interest cost, dilution of shareholders, and disruption caused by streaming will likely lead to a significant drop in AMC’s stock price even from its current low level of almost $8.50.

While AMC stock may have moved a lot, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how how the stock valuation for Netflix vs Synopsys shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

 

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