AMC Stock: The Dilution Dependency Is Real
By Bernard Zambonin,2023-01-11
AMC's business fundamentals are still far from great. As a result, the company's management is relying on further dilution to move the business forward.
- AMC still holds a massive load of debt and has been burning cash quarterly.
- Growth in the movie theater industry is expected to slow through 2027.
- AMC's management is exploring the option of raising cash by issuing more shares and converting APEs into common stock.
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How Are AMC's Business Fundamentals?
Although the movie theater chain's business fundamentals are better than they were at the height of the COVID pandemic, AMC Entertainment ( AMC ) - Get Free Report is still under serious strain.
Since the first quarter of 2020, the company has failed to report positive operating income. It gets worse when we look at AMC's balance sheet, which shows negative equity of $2.58 billion.
Currently, AMC's total debt stands at about $10 billion. Of this, about $128 million is not reflected in its current liabilities.
Over the past five quarters, the company has burned through about 62% of its cash reserves — or roughly $1.1 billion. AMC currently has $685 million in cash, which has at least enabled the company to ward off bankruptcy fears in the short term.
AMC's Core Business Doesn't Look Promising
Even worse for AMC is the fact that there's not much hope its core business will improve in the near future.
According to data from Statista , the estimated compound annual growth rate (CAGR) for cinema ticket revenue in the U.S. is expected to be only a paltry 2.15% from 2023 to 2027.
As illustrated in the chart below, revenue is expected to grow 4.3% in 2023, but that growth will decline to 1.4% in 2027.
Movie theaters have been facing very broad competition from other sources of media consumption — especially video streaming.
But according to AMC CEO Adam Aron, the bigger concern is that there are not enough new film productions on the horizon.
"At this point, there is only one topic that should be on the top of all minds and the tip of all tongues," he said. "It's not the coronavirus, it's not streaming, and it's not windows. It is this: Movie theater operators need more movies."
What's Keeping AMC Afloat?
Since AMC's management adopted the slogan "recovery, agility, and transformation," the movie theater chain has been looking for alternatives to its core business to ensure its financial health.
As a result, we have seen AMC invest in niches unrelated to its core business, such as the partial acquisition of Hycroft Mining ( HYMC ) - Get Free Report , initiatives to launch its branded popcorn, and moves into the meeting and corporate events market, among others.
But truth be told, none of these initiatives are likely to yield significant returns that will make AMC profitable again or deleverage the company any time soon.
Thanks to the meme-stock craze, which artificially inflated AMC's valuation, issuing new stock has become AMC's main method for raising cash.
Therefore, AMC management's initiative to create AMC Preferred Equity (APE) units was the right one. CEO Adam Aron has always made it clear that he wants to keep the company's retail investors happy, as well as focusing on the company's fundamentals.
By giving each AMC shareholder a single, non-diluted dividend share for every AMC share they owned, Aron created a special "currency" to strengthen the company's balance sheet.
However, if AMC converts the APEs to common shares in order to raise more cash in the future, that would cause AMC shares to become further diluted.
What's Next for AMC?
Further dilution is next. Given the troubled situation of its income statements, balance sheet, and cash flow statements, AMC has no other better and more agile option than to issue more common stock.
As AMC management pointed out in its most recent statement , the movie theater chain will host a special meeting with shareholders to vote to increase the authorized number of AMC common shares. This is to allow the conversion of APE units into AMC common shares.
In other words, it will dilute AMC's float.
In addition, shareholders will vote on a reverse split of AMC common shares at a 1:10 ratio. Reverse splits are usually done when a company is at risk of not meeting an exchange's minimum share price trading requirements (usually $1 per share).
This is probably intended to protect AMC's stock from a downturn due to the share issuance.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)
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