What happened
Shares of Cinemark Holdings (CNK -0.67%) were higher by as much as 20% in early trading on Jan. 25. That gain didn't hold, however, with the stock falling back to a gain of "just" 7% or so at 1 p.m. EST. The big news, however, took place at competitor AMC Entertainment (AMC -3.25%).
So what
AMC Entertainment has been struggling to find the capital it needs to muddle through the COVID-19 pandemic. It had earlier warned that bankruptcy was a possibility if it didn't come up with a material amount of cash. Today, the company announced that it had acquired additional funding, and the CEO stated that bankruptcy was not a concern. The company's stock soared on the news, taking peer Cinemark along for the ride.
Image source: Getty Images.
The interesting thing is that the two companies are not in the same financial shape. Cinemark is struggling under the same pandemic headwinds, but there's a huge difference when you compare balance sheets. Cinemark's financial debt-to-equity ratio, for example, was around 2 times at the end of the third quarter, while AMC's number was just over 10 times. Cinemark had less than half as much debt on an absolute basis. So while AMC has been desperate for cash and doing whatever it must to survive, including selling stock even though its shares are at deeply depressed levels (diluting shareholders), Cinemark has been better able to roll with the punches. That's not a guarantee that Cinemark makes it through to the other side of the pandemic, but right now it certainly looks like it has a better chance than AMC.
Now what
Times are tough in the movie theater business thanks to the COVID-19 pandemic. There's no way around that fact, and the end is still a long way off, particularly for highly leveraged names like AMC. Cinemark is in comparatively better shape. Still, most long-term investors would probably be better off avoiding both of these names until there's far more clarity on the direction of the pandemic. That remains true even though AMC's success at finding new capital suggests that there is still support for the industry, at least in some corners of Wall Street. The pullback from the day's peak levels suggests that investors do, in fact, realize that the risks here are still quite large.
