Please ensure Javascript is enabled for purposes of website accessibility

AMC Entertainment Continues to Bet Big on Recliners

By Billy Duberstein – Mar 20, 2018 at 8:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Debt? What debt?

2017 was not a kind year to AMC Entertainment (AMC -1.70%) shareholders, with the stock plummeting 53.8% versus a 21.25% gain for the S&P 500.

AMC 1 Year Total Returns (Daily) Chart

AMC 1 Year Total Returns (Daily) data by YCharts

The culprits? Fears concerning long-term declines in movie-going, combined with AMC's sky-high debt load. In 2017, AMC's debt ballooned to $4.89 billion, giving the company a debt-to-equity ratio of 2.24, which is four to five times higher than its U.S. competitors:

AMC Financial Debt to Equity (Quarterly) Chart

AMC Financial Debt to Equity (Quarterly) data by YCharts

One would think that with investor sentiment so low, the company would address its big problem area, using all available cash flow to pay down this heavy debt load -- right?

Wrong. In fact, not only does AMC not plan to pay down its debt anytime soon, but paying off debt actually seems to be the company's lowest priority right now. Here's why.

Recline to grow

AMC plans to spend most of its cash flow (and then some) installing its trademark luxury recliner seats across more theaters. The company was the first chain to implement the recliner seating strategy, and returns have proved so successful that other cinema chains are now following suit.

To stay ahead of the pack, AMC then acquired three theater chains in late 2016/early 2017, none of which had installed recliners: Odeon and Nordic in Europe, and Carmike in the U.S. Management's strategy was not only to take on significant debt to purchase these companies, but then also invest most of its EBITDA (about $500 million out of the $822.5 million in 2017 adjusted EBITDA) in order to quickly upgrade the new chains. 

CEO Adam Aron reassured investors that the returns on the first recliner seats in Europe were "through the roof," and that the company plans on renovating another 55 theaters this year (the same number as 2017): One third in Europe (which made up roughly 27% of AMC's 2017 revenue), and much of the rest across Carmike. 

Aron elaborated:

Given the greater than 25% returns we are achieving on the recliner renovations in the United States and recliner returns far superior to that in Europe and in the former Carmike theaters, we continue to believe that the reinvestment of free cash flow back into the business is a better deleveraging tool than paying down debt, carrying roughly 6% fixed interest rates and with stretched out maturities.

Borrowing money at 6% to create 25%-plus growth seems like a no-brainer to Aron and his team, even though the company's debt load is clearly weighing on investor sentiment.

Management expects this year's renovations to only cost about $450-500 million net of landlord contributions, less than last year's $500 million, due to lower costs in Europe and Carmike's presence in smaller markets. Eventually, the company will have renovated its best targets by 2020 or 2021, after which it will harvest more cash flow, and then pay down debt... or will it?

two hands reach into a bag of  popcorn in a movie theater.

Is AMC over-extending itself? Image source: Getty Images.

Dividends, repurchases, and... VR?

You might think after recliner investments, the company would next turn to paying down debt. You would be wrong. In fact, the company spent its remaining cash on three other priorities in 2017, despite a challenging summer box office.

First, management has maintained its $0.20 quarterly dividend, which amounts to roughly $100 million annually. Investors shouldn't expect this to change, as management has repeatedly stressed the importance of maintaining this payout.

Next, the company spent even more cash on its new share repurchase program, approved back in August. In light of the stock's precipitous decline during last summer, the board approved a $100 million repurchase program, and through the fourth quarter the company bought 3.2 million shares for $47.5 million at an average price of $14.86.

But wait, there's more! AMC also invested $10 million virtual reality start-up Dreamscape and Central Services Studios, Inc. in 2017, following that up with yet another $10 million investment in January.

Dancing with debt

AMC made roughly $822.5 million in adjusted EBITDA in 2017 and ended the year with net debt of $4.58 billion, for a net debt-to-EBITDA ratio (a common measure of company leverage) of 5.56, which is quite high. Clearly, the company believes the theater business will improve in 2018, and that it will be less levered in the future thanks to growing profits rather than decreasing debt.

That's all to say that if 2018 winds up being a lackluster year for the theater industry or if management's plans don't pan out, AMC will be stretched very thin. 

The company does have a fallback option, though, having previously mentioned a potential IPO of its European theaters. European theater chains currently garner higher valuations than those in the U.S., and if the company can raise enough cash at good valuations, it could pay off some (though not even close to all) of its debt. Of course, selling the assets would also mean foregoing the attractive returns the European theaters are apparently generating.

So far, the 2018 box office has been strong, exceeding even last year's record first quarter by 11.9% on the back of breakout hit Black Panther. With the aggressive reinvestment plan AMC is undertaking, the company had better hope things stay that way.

Billy Duberstein owns shares of AMC Entertainment Holdings. His clients may have positions in some of the companies mentioned.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AMC Entertainment Holdings Stock Quote
AMC Entertainment Holdings
AMC
$7.51 (-1.70%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.