tiprankstipranks
Red Flags and Debt Looming Over AMC Entertainment
Stock Analysis & Ideas

Red Flags and Debt Looming Over AMC Entertainment

AMC Entertainment Holdings, Inc. (AMC) engages in the theatrical exhibition business through its subsidiaries, having operations in the United States segment and International Markets segments. The company was founded in 2007 and is headquartered in Leawood, Kansas.

AMC stock has outperformed the broader U.S. stock market in 2021. However, shares of AMC Entertainment Holding seem to have lost their momentum in the past three months. After showing gains of nearly 1,7345% in 2021, the stock lost around 12% in the past three months. This loss seems minimal compared to the total gains in 2021; nevertheless, it may indicate that the company’s best days are over.

I am bearish on AMC stock, due to five key factors that pose severe red flags. (See Analysts’ Top Stocks on TipRanks)

AMC Stock: The Negative Factors

All the negative factors that I will mention about AMC Entertainment relate to the company’s fundamentals, with one exception. The first factor is that AMC Entertainment turned to raising cash via stock offerings to fund its operations amid the pandemic. AMC Entertainment’s shareholders have been substantially diluted in the past year, with total shares outstanding growing by 274.1%. This is a massive stock dilution.

Second, the sales growth was anemic even before the pandemic. In 2018, revenue growth reported was 7.51%, in 2019 it was 0.19%, and in 2020, due to the pandemic, it collapsed -77.29%. For the period 2016-2020, the last time a significant sales growth was reported was in 2017, with a figure of 56.97% and revenue of $5.08 billion.

Third, for 2019 and 2020 AMC Entertainment has been unprofitable, with widening losses in 2020, due to the pandemic. Turning to quarterly results, the entertainment company does not show any progress in 2021, even as the reopening of the U.S economy and global economies is in force. For the three quarters of 2021, AMC Entertainment Holdings reported a net loss of ($566.9 million) for Q1, a net loss of ($343.6 million) for Q2, and a net loss of ($224.2 million) for Q3.

Fourth, cash burn is another problem, with a ballooning negative free cash flow of ($1.23 billion) in 2020, compared to a positive figure of $60.9 million in 2019. Again in 2021 this negative trend of burning cash remains. For Q1, Q2 and Q3 AMC Entertainment reported free cash flow of ($324.8 million), ($251.7 million) and ($143.8 million) respectively.

Fifth, and this is probably the biggest concern now for AMC stock, the company has a very weak balance sheet, with a lot of debt, that is unsustainable and can lead to bankruptcy in the next years if fundamentals do not change. AMC Entertainment has a low Cash-To-Debt ratio of 0.15, and a Debt-to-Equity of -6.65.

What is worse than a company having a large but positive Debt-to-Equity ratio? The answer is simple: having a negative Debt-to-Equity ratio. AMC Entertainment now has negative shareholder equity, with more liabilities than assets. This is considered a very risky sign, suggesting that the company may be at risk of bankruptcy. Indeed, the Altman Z-Score of -0.25 puts AMC Entertainment into the distress zone.

AMC Stock: The Positive Factors

In late October 2021, AMC Entertainment issued a press release stating In late October 2021, AMC Entertainment issued a press release with the title, “AMC Entertainment Confirms October Theatre Admissions Revenue for AMC Both in the United States and Internationally the Highest It Has Been in Any Month Since Covid Forced the Closure of Theatres Early In 2020.”

The press release explained that AMC’s U.S. October 2021 revenues for admission tickets were the highest of any month since February 2020. In its international theaters, ticket admission revenues in October 2021 were the highest of any month since before the pandemic-induced shutdowns.

This is very positive news indeed, helping the sales growth amid the pandemic and resurgence of COVID-19 cases globally. Another decision that shows the management is trying to boost revenue is the announcement about AMC’s entry into the popcorn industry. AMC will start selling its movie theater popcorn in shopping malls and kiosks, in addition to offering home delivery of its popcorn.

We do not know yet the outcome of this decision and whether it will be significant to the total revenues generated, as we must wait for real numbers of sales for the new popcorn business.

Wall Street’s Take

AMC Entertainment has a Moderate Sell consensus rating, based on 0 Buys, 2 Holds, and 3 Sells ratings. The average AMC Entertainment price target of $8.17 represents 78.2% downside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles