Please ensure Javascript is enabled for purposes of website accessibility

Why AMC Entertainment Surged 45.5% in August

By Billy Duberstein – Sep 4, 2020 at 8:53AM

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

The world's largest movie theater chain got a boost from optimism around theater reopenings, but should investors chase this speculative story?

What happened

Shares of AMC Entertainment Holdings (AMC -1.70%) rose 45.5% in August, according to data from S&P Global Market Intelligence. Shares rose off of extremely low levels as theaters began to reopen across the U.S. after several months of lockdowns. Of course, AMC had fallen to very low levels prior to August as the COVID-19 pandemic forced theaters to close, so longtime shareholders are still looking at a very depressed stock -- in a company for which bankruptcy is still on the table.

So what

Although AMC reported second-quarter earnings to begin the month, the numbers weren't the reason for the stock price increase. Basically all of AMC's theaters were closed, and the company reported only $18.9 million in revenue, a massive $561 million net loss, and $267 million in negative free cash flow.

A young girl watches  a movie in a theater wearing a face mask.

AMC Entertainment isn't out of the woods yet. Image source: Getty Images.

Rather, investors got excited that U.S. theaters were reopening and that highly indebted AMC might be able to stave off bankruptcy. The company had already reopened some theaters in Europe and the Middle East in July, but in August, the company announced it would be reopening over 100 U.S. theaters on Aug. 20, selling tickets for just $0.15, the same price the company charged 100 years ago. Management then touted the "successful first weekend" and reopened another 170 theaters on Aug. 27.

In addition to these initial reopenings, a recent court decision from a New York federal judge cleared the way for studios to be able to own theater chains again, overturning antitrust rules dating back to the 1940s. Theater chains jumped in response, as the prospect of getting bailed out through a sale to a studio emerged as a potential alternative to bankruptcy.

Now what

After AMC's August surge, investors should still steer clear of this consumer discretionary name until there is more clarity surrounding actual moviegoing attendance and AMC's profitability in this strange environment. AMC raised $500 million at a 10.5% interest rate in April and did additional restructuring of its debt in July, pushing out maturities and lowering some cash interest costs. That's impressive, but still amounts to kicking the can down the road.

Even at the end of the month, AMC sold off a few of its theaters in the Baltic region for $77 million, and in September even offered some 30 million shares to the public after August's run-up, diluting shareholders in order to raise extra cash.

These recent share and asset sales don't give me a lot of confidence that AMC's troubles are over just because its theaters are reopening. If anything, it shows a company scrambling to raise cash while it can. The company is still "on the clock" in terms of getting back to any sort of profitability, and if things don't get back to normal in a few quarters, AMC may have to dilute again. In a worst-case scenario, bankruptcy is still on the table.

Billy Duberstein has the following options: short January 2022 $3 puts on AMC Entertainment Holdings. His clients may own shares 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
$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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

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.