What happened
Shares of movie theater operator AMC Entertainment (AMC 1.79%) rose more than 9% in the first half hour of trading on Wednesday. Although the stock gave back some of those gains pretty quickly, it was still up by around 5% at 10 a.m. EDT.
So what
AMC's most obvious problem is that the COVID-19 pandemic has shut down its theaters for months. That near complete lack of revenue, however, gives it another material issue to deal with -- it can't afford the leverage it's carrying on its balance sheet. With a troublingly high financial-debt-to-equity ratio of roughly 15 as of the end of the first quarter, this is a large problem. AMC's ability to survive the pandemic is legitimately in doubt.
Image source: Getty Images
Wednesday, however, brought reports that the company is near a deal with lenders that will allow it to avoid bankruptcy, according to The Wall Street Journal. Investors were relieved by that news -- at least a little -- and bid the stock up. That said, the reality is that AMC remains a heavily leveraged company that won't reopen for business in a meaningful way until late July at the earliest. And even then, it will have to convince potential patrons that seeing a movie in a theater is reasonably safe. It's likely that its return to somewhat normal business operations will be a long and difficult process.
Now what
Assuming AMC does reach an agreement with its lenders, it's likely to be just a temporary reprieve. The bigger story will continue to revolve around the question of how quickly the company will be able to get its theaters back up and running. Its efforts on that score remain very much a work in progress, so expect this stock to continue to be volatile. Most long-term investors will be better off avoiding AMC given the very material risk that its debt load could still drive it into bankruptcy court even after it starts showing movies again.
