Shares of AMC (AMC 10.41%) soared 31% on Friday, and the good news didn't end with that one-day rally. B. Riley FBR analyst Eric Wold -- one of the more vocal bears on the country's largest movie theater chain -- is kicking off the new trading week by upgrading AMC stock. Wold had a $0.25 price target, but following news late last week of the government's plan to gradually reopen the economy and AMC's own liquidity update, he's feeling less pessimistic about the chain's chances to survive without filing for bankruptcy.
This is the week that the NFL is holding its annual draft of college players, and apparently it's not just the Bengals, Dolphins, and Chargers that will be taking their quarter back. Wold is lifting his price target from $0.25 to $4, and the 16-fold update is accompanied by his upgrading of AMC stock from sell to neutral.
Image source: AMC Entertainment.
No time to die
The Friday pop in AMC stock came following the chain's commencement on Thursday afternoon of a $500 million private offering of first lien notes that will come due in five years. The move will buy AMC time, something it desperately needs since its multiplexes went dark in mid-March. Without that money, AMC feels it has enough cash on its books to last until a partial reopening of its theaters in July. With proceeds of the proposed debt offering, it believes that it can extend its liquidity to hold out until Thanksgiving for a partial reopening.
AMC and its smaller peers are in trouble. They have been shaving costs while their digital projectors collect cobwebs. AMC furloughed 25,000 employees and reduced salaries elsewhere. It reportedly sent out a letter to its multiplex landlords late last month, warning that it will not be paying its rent for April. It remains to be seen how accommodating its landlords will be about potential evictions once we're on the other end of this pandemic crisis.
A quiet place (part II)
Staying alive is essential for characters in movies, especially in a world of sequels. The problem for AMC is that you probably won't like the sequel. AMC is already talking about trimming per-screen capacity to allow for social distancing, but that was happening organically anyway; theater attendance has been sliding for a couple of years now.
The near-term concern is what folks will see at the local multiplex when the industry reopens. Studios have been pushing out releases of their films -- including No Time to Die and A Quiet Place Part II -- for months to as long as a year. Production of new content has naturally also ceased. It takes time for a studio to market a film, so it's not as if AMC can just say that it will be firing up its popcorn maker in a week and desirable flicks will magically become available. This is going to be a slow ramp-up process for an industry that's currently on borrowed time (and borrowed at what will likely be high interest rates to boot).
Along the way, we have consumers who seem perfectly happy streaming content at home. This shelter-in-place phase of the COVID-19 outbreak is making more people comfortable with the technology to tap into the seemingly limitless content that is available digitally these days.
Another thing that will hold folks back from the box office is the inevitable recession that we're barreling into with unemployment rates rising and consumer sentiment tanking. Even folks who decide to head out to a movie theater will be less likely to spring for the pricey high-margin concessions that account for the lion's share of a theater's profit. It's hard to fathom theater chains returning to relevance later this year or even in a couple of years. We've seen how this disaster film ends, and now is not the time to buy AMC stock.
