Shares of AMC Entertainment (NYSE:AMC) rallied nearly 5% the day after its delayed first-quarter earnings report came out Tuesday, June 9. AMC Entertainment is the largest movie theater company in the world, and needless to say, it was heavily affected by COVID-19, as basically all of its theaters were closed down due to health concerns from mid-March on.
That led to some predictably ugly first-quarter results, with revenue down 21.6%, and adjusted EBITDA down a whopping 97.1% to nearly break-even, despite theaters only being shut down for the final two weeks of the quarter. Still, shares actually rallied hard the next day, as management announced that basically all of its theaters were set to reopen in July. AMC also revealed some impressive cost-cutting measures, and has recently raised money to get the company at least through Thanksgiving with no incoming revenue.
Yet for each positive given by management on the conference call, there was usually another even bigger reason for caution behind it. Here are three reasons to steer clear of this high-risk stock right now.
January and February outperformed last year, but that was a low bar
AMC management began the conference call with analysts by saying that, prior to the COVID-19 pandemic, the company had been doing quite well. Before the shutdowns, revenue was up 10% in January and February, and EBITDA was up $53 million versus the first two months of 2019.
However, investors should know that the first quarter of 2019 was an awful period for the cyclical theatrical film industry, which can be extremely lumpy quarter to quarter, depending on the mix of titles released in any given period. In fact, revenue in the first quarter of 2019 was down 13.2% from the first quarter of 2018, and Q1 2019 EBITDA was down a whopping $169 million from the prior year. That implies that even with the "improved" performance in January and February, early 2020 results were still tracking well below 2018 results.
AMC says it can still be profitable at 25% capacity, but that may be misleading
With many states now beginning their reopening protocols as we hit the summer months, newly reopened theaters will, depending on local rules, restrict attendance to only 25% capacity per showing, with a gradual increase to 50% over time, depending on the trajectory of coronavirus cases.
AMC management made the point that even in a "normal" year like 2019, the theater chain only sold about 17% of its available seats. Its argument is that theaters can still be profitable with only 25% capacity or 50% capacity restrictions, unlike airlines or cruises, where companies need to fill a large amount of overall capacity in order to be profitable.
However, remember, this 17% counts all types of showings, including matinees, late-night screenings, and weekdays when there is very little traffic. In addition, there is a wide variety of theaters -- some successful, and others not. Most of us only go out to see films on the weekends, when theaters are mostly filled. Unless consumer behavior changes a lot, it's an open question as to whether people want to see films so badly that they're willing to see a film at strange off-peak times, or at a less desirable theater, just in order to attend a theater screening.
AMC got rent deferrals and raised cash, but should continue to rack up losses
Management also pointed out the admittedly huge positive of securing rent deferrals, abatements, and even forgiveness during the pandemic. Each landlord contract is negotiated individually, and the company was able to renegotiate a number of rent deferrals during the lockdown, even modifying rent terms for the rest of 2020 with many individual landlords. CEO Adam Aron said:
We've also had considerable success especially for the second half of 2020 in actually lowering rents and converting rents from fixed price rents to percentage of revenue rents. And similarly with ... other individual landlords we have been talking about forgiving rents, not just deferring rents from the Q2, but actually forgiving rents in Q2. With other landlords we've added considerable success and discussions about actually reducing our rents going forward, not just for a short period of time like in 2020, but permanently with respect to the entire duration of the lease.
This is no doubt great news, and a big deal for AMC's ability to survive through this period. However, it's not a panacea if people are still wary of attending movies, especially if there's a second wave of COVID-19 this fall and winter (or earlier). And as theaters open up, even a variable rent structure based on a percentage of revenue will be an ongoing cost.
Meanwhile, rent costs, while significant last quarter, were only AMC's second-largest operating expense, behind theater operating expenses. So, while reduced or variable rent is nice, it's no cure for lower theater traffic.
AMC also won't be getting any breaks on interest expense, which is another significant expense. Interest expense came in at $71.3 million in the first quarter, and that figure will increase going forward, with the additional $500 million of 10.5% notes the company managed to sell in April. While it's nice that AMC was able to raise money in order to bridge the gap to an economic reopening, the new notes only added onto the company's already-heavy $5 billion-plus debt burden.
Don't chase AMC's rally
While it's possible AMC will survive through this period, it's by no means certain if people will return to theaters with the frequency they once did. Even prior to the COVID-19 pandemic, AMC was already struggling to generate enough cash flow to make a significant dent in its high debt load, and competition from in-home streaming is still an ongoing concern.
Now with fewer cash flows and even higher debt to pay back, it's a more difficult proposition. With shares of this consumer discretionary stock miraculously nearly all the way back to where they were to start 2019, AMC's stock is far too risky right now for any investor except high-risk speculators.