Movie theatres have been ravaged because of the pandemic. AMC Entertainment (AMC), the leading theatre chain in the country, became a penny stock last year because of the uncertainties that encompassed AMC’s financial ability to keep its business from sinking. However, AMC’s plan to sell its stock to raise some cash has somewhat helped the company’s financial stability, and the stock has gradually risen after declining more than 70% early last year. The historic short squeeze triggered by the rise of GameStop, Inc. (GME) helped AMC gain some momentum as well, but as investors, the focus should remain on the financials of the company.
Movie Theatre Industry’s Sales Decline
The company has the largest movie theatre chain in the U.S. and Europe and operates around the globe with about 1000 theatres and more than 11,000 screens. AMC annually receives an estimated 350 million guests, but this number has significantly contracted due to the pandemic. The company is valued in the market for a lofty $6 billion, which is one of the reasons why value investors continue to steer clear of AMC as the stock certainly appears to be overvalued at such a sky-high valuation, especially considering the dire financial position the company has found itself as a result of mobility restrictions.
According to ComScore, movie ticket sales in the U.S. declined by 80% last year. Sales from 2020 were only $2.2 billion, whereas, in 2019, the industry generated revenue of $11.4 billion. The company was hit hard enough that its CEO Adam Aron even concurred with his advisers from Weil Gotshal and Moelis & Co. to get the paperwork ready to file for bankruptcy.
Last year, AMC reported a net loss of $4.6 billion, which was primarily driven by the virus-induced recession but was able to raise roughly $1 billion to help it sustain the pandemic. Half of the cash that was raised was mainly derived from the sale of its stock. In December 2020, the company was able to raise $204 million. Even though there are about 500 movie theatres open in the U.S., the company doesn’t have much luck in generating many sales from tickets as the pandemic and social-distancing requirements have clamped down ticket sales. The outlook remains challenging because many Americans are yet to feel comfortable hanging out with their friends and family even though the vaccination program is making steady progress.
AMC’s Share Price Movement
Last year in October, AMC warned investors that the company would run out of cash by the end of 2020 if it doesn’t succeed in raising cash. This news drove the stock price down significantly. According to CNN Money, AMC’s forecasted median target price is $2 with a high target price of $7 and a low target price of $1. The stock’s trading price as of March 19 was $13.83.
Share price movement as of March 18, Source: Morningstar.com
AMC’s Initiatives to Keep The Company Afloat
In September 2020, the company tried re-opening the theatres by offering big movie hits like ‘Tenet’ to generate some revenue. But, consumer interest to go out and watch a movie remained low, and this forced the company to shut down the theatres once again.
Despite the financial struggles AMC is facing, it’s being creative with attracting people to theatres and has come up with a plan to sell its stock to small investors instead of institutional investors to make some cash to keep the company afloat. This idea was pitched to the CEO and CFO of AMC by a small investment bank named B. Riley, which was then hired to work alongside Goldman Sachs on selling equity by taking alternate turns each week while Citigroup focused on finding other sources of bankruptcy funding.
The plan has helped AMC spectacularly avoid bankruptcy for the time being and has saved a significant amount of money. AMC also announced in October 2020 that it would be renting out its theatres for family and social events for just $99. The company also sold 9 theatre chains in the Baltic region, making $77 million from the sales. But according to an analyst at Million Acres, bondholders have been insisting AMC file for chapter 11 bankruptcy to give the company a chance to restructure.
Takeaway
AMC might appear to be a great investment to play out the expected reopening of the economy. However, the company has a lot to do to secure its financial health, and movie theatres could remain under pressure even after pandemic fears subside because of macroeconomic trends in favor of over-the-top content streaming.
Disclosure: The author does not own any shared mentioned in this article.
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