Please ensure Javascript is enabled for purposes of website accessibility

1 Consumer Discretionary Stock to Avoid No Matter What

By Lawrence Rothman, CFA - Mar 12, 2021 at 9:45AM

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

Relaxed COVID-19 restrictions will not provide a panacea to AMC.

AMC Entertainment's (AMC 17.99%) stock has caught the attention of Reddit group WallStreetBets this year. Starting 2021 at around $2, the price jumped to over $20 by the end of January. At the present level, it is still about six times where it began the year.

Despite the day traders' enthusiasm, there are good reasons you should not buy into the hype. Let's explore them.

A big screen with a lot of separate pictures.

Image source: Getty Images.

More movie-watching options

Thankfully, COVID-19 vaccines are now being rolled out, which will hopefully bring back a sense of normalcy to the world. As case numbers go down, governments are permitting movie theaters to reopen. This includes New York City, where officials have allowed them to operate at 25% capacity.

But I'm skeptical about how much this will help AMC's results. Certainly, 2020 was a tough year due to the pandemic. Revenue fell by more than 77% to $1.2 billion and AMC's loss widened to $4.6 billion from $149.1 million.

However, the virus did accelerate underlying trends that have hurt the industry for some time. In 2019, prior to the pandemic affecting the movie industry, AMC's revenue was $5.5 billion, flat compared to the year-ago period. However, with faltering attendance, its admission revenue fell by 2.5% to $3.3 billion.

While this year will undoubtedly bring more people into the theaters, causing revenue to rebound somewhat, AMC still faces major long-term challenges. That's because more movie makers are releasing films even quicker on streaming and premium on-demand services. These companies had already been shortening the time between the theatrical release and when people could watch a movie at home.

AT&T's Warner Brothers division has announced it will simultaneously release all of its scheduled 2021 movies in theaters and on its HBO Max streaming services. Walt Disney is mixing theatrical releases with putting movies directly on its Disney+ service, albeit with an extra fee to watch films early.

In any case, the window between when a movie appears in theaters exclusively and when it becomes available on streaming and other home-based services is shrinking. This provides more options for people to watch, which is great for consumers. However, it does make it more difficult for movie theater companies like AMC to get movie watchers in the door.

A lot of debt

Management has proven skillful at adverting bankruptcy, escaping several times last year. Most recently, AMC raised $917 million by issuing debt and equity in January, a step that CEO Adam Aron says removes talk of an imminent bankruptcy filing "off the table."

However, I wouldn't get too excited given the heavy debt load. At year end, AMC's debt was $5.8 billion, up nearly $1 billion from 2019. It had $308.3 million of cash at the end of 2020. Meanwhile, its operating cash flow was -$1.1 billion.

Not a good combination

If you are considering making an investment in AMC's stock, I'd advise you to reconsider. With competing ways to watch new movies sooner and a lot of debt, the combination will likely leave you with buyer's remorse.

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, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$14.43 (17.99%) $2.20
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$109.32 (3.51%) $3.71
AT&T Inc. Stock Quote
AT&T Inc.
T
$21.29 (-0.14%) $0.03

*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 service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

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.