It's only February, but 2021 has already held a year's worth of excitement for AMC Entertainment (AMC 5.75%) shareholders.
The movie theater operator limped into 2021 with CEO Adam Aron previously having said that the company might be forced to declare bankruptcy if it could not raise enough capital. However, on Jan. 25, Aron announced that the company had raised enough to cash to put bankruptcy effectively "off the table," giving the stock a shot in the arm. Later that week, the stock skyrocketed as it caught on with Reddit traders on WallStreetBets, shooting up to more than $20 a share on a short squeeze. Soon after, it fell back down near its prior levels as traders pocketed gains.
Despite its challenges, a number of investors are hopeful that AMC can bounce back from the pandemic over the next year. Let's take a look at where the world's largest movie theater chains will be a year from now.
Bills to pay
The biggest threat to AMC over the next year is its debt burden. Its corporate borrowings increased from $4.7 billion at the end of 2019 to $5.8 billion at the end of the third quarter, and the company has added to its debt burden since then at interest rates as high as 15%. AMC's annual interest payments were already steep coming into the pandemic. Its interest expense from its corporate debt was $292 million in 2019, and it will be higher than that in 2020 and 2021.
In addition to the mounting debt from the pandemic, the company has also significantly diluted shareholders. While that won't affect the underlying business the way increased interest expense will, it does weigh on the stock price. At the end of the third quarter, the company had 107 million shares outstanding, but filed shelf registrations in December and January to sell 300 million additional shares, meaning total shares outstanding may now be above 400 million, significantly diluting existing shareholders. In other words, the company will have to be four times as profitable as it was before the pandemic to deliver the same value for shareholders.
The good news for investors is that AMC faces no major debt maturities until 2024, so if it's able to safely reopen movie theaters later this year, it won't have to worry about bankruptcy for the next few years.
What AMC will look like postpandemic
The other key question for investors to ask is what the movie theater industry will look like after the pandemic. Analysts are generally expecting a surge from pent-up demand in areas like travel and entertainment that have been off-limits during the crisis.
There are signs indicating that AMC could also benefit from pent-up demand once audiences can return to theaters. Imax said it saw a surge in attendance in China over the recent Lunar New Year weekend, with more than 1 million tickets sold on Feb. 12 even as most theaters there are limited to 75% capacity.
Some surveys have also indicated that Americans are eager to return to movie theaters, but the pandemic has hastened changes in the industry that were already afoot. A number of new streaming services have hit the market over the past year, and the big Hollywood studios, like Warner Bros., Disney, and Universal are experimenting with releasing new movies directly on streaming rather than in theaters. Warner Bros. has said it will release movies simultaneously on HBO Max and in theaters, and Universal negotiated the theatrical exclusivity window with AMC down to just 17 days.
While studios will want to release movies in theaters again when the opportunity arises, they've also gained leverage during the pandemic, and shorter exclusivity windows and simultaneous releases on streaming may be here to stay. Studios control the supply and now have a direct-to-consumer outlet, meaning AMC is at a disadvantage here.
AMC stock in a year
Remarkably, after a brutal year that's included revenue plunging more than 90% in the second and third quarters and several close calls with bankruptcy, the stock is down only 22% over the last year, and the company paid a 10% dividend yield back then, which is not coming back. That shows that investors are pricing in a strong recovery for the stock right now.
However, even if the company benefits from pent-up demand for the theater experience, the company's financial position is going to be significantly worse than it was before the pandemic. Its debt burden will be even greater, and it will struggle to turn a profit with the interest payments it will have to make. Additionally, the share dilution means the value of an individual share is much less than it once was.
With no major debt payments until 2024, AMC no longer seems like a bankruptcy risk, but this is still a stock best avoided. AMC may look like a promising recovery stock, but even if audiences swarm theaters when the pandemic ends, there are simply too many financial headwinds facing the company to justify its current price tag.