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1 Consumer Discretionary Stock to Avoid No Matter What

By Lawrence Rothman, CFA – Jul 15, 2020 at 11:22AM

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AMC Entertainment is in a battle to survive.

COVID-19 cases are roaring back, which could inflict further damage on economic conditions and employment. Combined with the fact that the U.S. economy is already in a recession, consumer discretionary companies are confronting a challenging environment. After all, under difficult circumstances, it is natural for people to pare back on unnecessary purchases.

AMC Entertainment (AMC 3.23%) is certainly not immune to this phenomenon. However, unlike other companies that will bounce back when economic conditions improve, this entertainment company is facing serious issues that threaten its very existence.

Tthis is one company that does not deserve your consideration. Here's why.

An empty movie theater with the credits rolling on the screen.

Image source: Getty Images.

Heavy debt burden

For starters, AMC has a ton of debt. It stood at $5.1 billion as of the first quarter. There are reports that the company is close to an agreement whereby bondholders would provide a $200 million loan and exchange their unsecured debt for second-lien debt. The agreement would hold off a potential bankruptcy filing.

This follows a $500 million first-lien bond offering in April that boosted AMC's cash coffers after reports about a possible bankruptcy initially surfaced.

While delaying a bankruptcy filing, which typically wipes out equity investors, is positive, there's no telling how long this can go on. Stock investors are better off not relying on the kindness of a company's lenders.

Certainly COVID-19, which forced AMC to shut down its theaters in March, has damaged its results. Its first-quarter revenue fell by 22% year over year, from $1.2 billion to $941.5 million. During the quarter, its loss was $2.2 billion, compared to a $130 million loss in the year-ago period. With theaters closed for the second quarter, this period's results will feel the effects even more.

AMC had planned to open its theaters to the public in mid-July, but it has pushed the timetable back to the end of this month.

There is more going on than the coronavirus pandemic, however.

Sparring with heavy hitters

With a growing number of streaming services, people are growing accustomed to watching movies at home. It's not clear that theaters will see attendance bounce back once customers are allowed back in.

Streaming services like Netflix (NFLX 1.30%) have been looking to shorten the time between a movie's release into theaters and when people can watch it at home. For instance, the streaming company aired The Irishman in late November, just a few weeks after it initially appeared in theaters.

More recently, during the pandemic, movie studios released their content on premium streaming services and video-on-demand (PVOD) services. This month, Walt Disney's (DIS -0.48%) streaming service, Disney+, starting showing Hamilton more than a year ahead of its planned showing in theaters.

In response to this trend, AMC made a bold and risky move. The company decided it would no longer show any of Comcast's (CMCSA -0.10%) movies after the head of its NBCUniversal unit made comments suggesting the business would look at releasing movies simultaneously in theaters and via a PVOD service after the success of its Trolls World Tour film.

Why is this so risky? Remember, content drives people to watch movies. If AMC doesn't carry a film people want to see, they will watch it elsewhere.

And there are even more streaming choices. Aside from Netflix and the increasingly popular Disney+ (launched in November, it has over 50 million paid subscribers), there is also AT&T's (T -0.76%) HBO Max, Comcast's Peacock, and Apple's (AAPL -1.08%) Apple TV+.

This ever-changing landscape, when combined with a heavy debt burden, threatens AMC's very existence. Avoiding this stock is the prudent action.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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