This Only Happens in the Movies

You're not supposed to yell "fire" in a crowded movie theater, but that is essentially what AMC Theaters did last week. Its parent company shelved its IPO just as investors were lining up to pay between $18 and $20 a pop for nearly 40 million shares.

A cynic would argue that it's for the best. AMC was coming to market with a mountain of debt, posting operating losses for nine consecutive years. The market needs that like it needs another Vonage IPO.

However, there was a fair deal of urgency in getting the deal done. A slate of highly anticipated movie releases over the next three months should make this the best summer box office in celluloid history. Sure, it may not hold up once we adjust it for inflation over the years, but AMC was hoping that its stock would be snapped up by investors looking to cash in on the return of Peter Parker, Princess Fiona, Captain Jack Sparrow, and Harry Potter.

AMC is in a bind now. If it isn't able to deliver a healthy return to profitability under this promising slate of blockbuster hopefuls, it may never get the market to buy into the company.

Cinemark left its mark
Was the disappointing IPO of Cinemark Holdings (NYSE: CNK  ) two weeks ago to blame? Cinemark, the third-largest movie chain behind Regal (NYSE: RGC  ) and AMC, went public at $19. It has closed below that price during half of its first ten trading days.

That couldn't be the only reason. Cinemark holding its own is better than Cinemark crumbling to pieces. The stock also priced at the high end of its projected range, so demand wasn't a problem.

Cinemark was helped by its profitability heading into the 2007 summer season. The company posted a profit of $0.8 million on $1.2 billion in revenue last year. The net income may be pitiful, but a lot of that is the company's hungry debt load. Operating income at Cinemark actually clocked in at a respectable $127.4 million.

Waiting for the end credits
The multiplex sector has been bogged down over the years. Sluggish attendance has been blamed on things like the emergence of home theater entertainment systems, narrower windows between cinematic and DVD releases, and a lack of product quality.

The fragmented sector that expanded through the 1980s and early 1990s imploded in the late 1990s. Bankruptcies were as common and predictable as Ben Stiller flicks. It did not look good for an industry that banked on stadium seating and overpriced concessions to win larger audiences.

The climate is kinder lately. The industry showed signs of life last year. Regal, Cinemark, and the smaller Marcus (NYSE: MCS  ) are profitable. Carmike Cinemas (Nasdaq: CKEC  ) closed out 2006 in the red, but was in the black in 2004 and 2005. Analysts expect all of the companies to be squarely profitable in the current year and to build on that come 2008.

AMC's income statements aren't as kind. Through the first three quarters of fiscal 2007 (the company's fiscal year ends in December), AMC posted a narrower loss than it did over the same three quarters a year earlier. With $2.6 billion in corporate borrowings and other long-term debt, turning a profit isn't easy.

Still, the timing of the pulled IPO is as intriguing as the timing of the offering in the first place. The chain backed out just as Sony's (NYSE: SNE  ) Spider-Man 3rocked the box office by clearing $148 million in ticket sales domestically over the weekend (and $227 million in 107 countries worldwide).

Gravity will dictate AMC's future from here. A buoyant summer may help lift shares of Cinemark and Regal higher. That would butter up the fire pole that AMC would use to make its market entrance. However, expectations will also be there for AMC to earn its keep by turning a profit this summer. If not, what's the point in greasing the fire pole? No one is going to yell "fire" in an empty theater.

Longtime Fool contributor Rick Munarriz is often at the AMC near his home. Don't worry, he's never the loud person talking through the movie. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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