AMC Entertainment's Moves Make Sense

AMC Entertainment (AMC 8.22%) files to sell 11 million shares, sending the stock down 30%. ExxonMobil (XOM 1.15%) loses a proxy fight as an activist firm gains a third seat on the board of directors. Motley Fool analyst Bill Mann, with host Chris Hill, analyzes those stories and FireEye's (MNDT) decision to sell part of its business (and its name) to a private equity firm.

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This video was recorded on June 3, 2021.

Chris Hill: It's Thursday, June 3rd. Welcome to MarketFoolery, I'm Chris Hill, with me today, the one and only, Bill Mann. Good to see you, my friend.

Bill Mann: How are you? How are you celebrating Mark Levin's birthday today?

Hill: Mark Levin, happy 40th birthday to Mark Levin. Maybe the greatest fake driver's license in film history.

Mann: You know, it's only one name, right? Yeah. If you look at the driver's license, his birth date on his fake ID was June 3rd, 1981. That means that Mark Levin is today 40 years of age. I will be celebrating later. I don't know about you.

Hill: If you're looking for a movie to relax with over the weekend, I will just say SuperBad, 88% on Rotten Tomatoes.

Mann: Yes, and the 12% are the ones who found the launch to be a bit much, which I can understand.

Hill: Understandable.

Mann: Yeah.

Hill: We've got an energy story that I don't understand. We have a cybersecurity story that I really don't understand. But we're going to start with the mayhem that is AMC Entertainment. People on Reddit are buying shares of AMC Entertainment, but you know who is selling? AMC Entertainment.

Mann: I like the fact that you're setting this apart and suggesting maybe you do understand this one.

Hill: I understand the optics of it anyway, but yeah, the company came out, they filed to sell more than 11 million shares, and the stock is down more than 30% today.

Mann: Right now, at the time that we're speaking, it could end anywhere. Even at this point, AMC stock is up more than 100% for the week. The company came out and said, we are going to take advantage of the market and they were very clear in their filing. It was interesting. They said there is no business reason for this level of volatility, there's no business reason for this price. We are going to sell and we are going to go out, use these proceeds to try and buy up some irreplaceable movie assets, which is great. This is exactly what they should be doing. What's so funny to me about the meme stocks in general, take GameStop for example, is that the company is almost irrelevant to the story. At no point do you hear, "Hey, the CEO is doing X", you just don't hear these things. The only thing that really bothers me about this, Chris, though, is that yesterday, the stock went up, and at one point, it was up 120% on the day, which is a lot, and AMC came out and said we're going to provide free popcorn and other benefits to investors knowing full well, had to, that they were going to be releasing something today, saying they were selling shares. That to me is just distasteful. Everything else about this I find fine.

Hill: I'm going to go in no particular order, I agree with you. It is distasteful the timing of that. That said, I think everything else that management is doing here makes sense. They are taking advantage of an inflated stock price. ... They're being very clear saying, "Look, here's why we're selling that." If you're a lawyer on staff at AMC Entertainment, you've got to be happy with the way they are handling this part of it.

Mann: You know, it would be awesome. Unfortunately, these things are bound by legal language. If they said, we're selling 11 million shares, wouldn't you? What do you expect us to do? The stock is down quite a bit today. Who knows where it will end up? This is a company that has not traded on its fundamentals. There is no reason that AMC, which lost $4 billion in 2020, which makes sense because the theaters were closed, it lost $150 million in 2019 when they were open. I have no explanation for this other than the market has lost its mind. But AMC is right to go ahead and say, "Well, OK, if you dare us to sell some, we're going to sell some, and we're going to keep selling until the price gets back to being in an irrational place, and at which time, we will have a lot of cash on hand."

Hill: I said this the other day. This is unlike some of the high-flying Cloud-based Nasdaq stocks that have come down 20%, 30%, 40% off of their highs over the last few months, those are at least growing businesses in growing industries. When you look at the business of movie theaters, the most important trend is the fact that for the past 20 years, steadily, year-over-year, incrementally fewer people are going to the movie theater. Now, there are years where the overall box office receipts increase, but that's due to price increases, that's not due to more bodies coming into the theaters so unless AMC has a plan to get more butts in the seats, I'm not sure how this has a happy ending.

Mann: Well, not only that, but the way that movie theaters make money is off of concessions, and for movies that have been there for more than three weeks. For the first three weeks and this has been pretty much contractual across the board, the studio gets all of those ticket revenues, they all go and then you start to have some negotiated split. What happened during 2020, and it's not the movie theater's fault, is that that relationship was broken. We don't have any guarantee that that's going to come back. We had some big hits that literally went straight to streaming. I don't know. The good news is that I think that the business case for AMC is almost irrelevant for what's going on, it's a meme, a $20 billion meme, so good luck, but I don't really see the business case, but I completely see why AMC will say, "Look, if you give us access to enough money and enough resources, we can maybe build a business case."

Hill: Let's move on to ExxonMobil; an Actavis firm called Engine No.1, has won a third seat on Exxon's Board of Directors, Actavis buying up shares and pushing for change in a given business is not unusual. What is unusual in this case is that Engine No.1 doesn't have a 9% stake in ExxonMobil or a 5% stake, they have a 0.02% stake in this company. How is this happening? How are they able to affect change, at least in terms of getting people on the board when they own slightly more shares of ExxonMobil's than I do?

Mann: Not many more. We know you're a big deal. What a disaster this is for Exxon's management team, particularly the CEO, Darren Woods. This is the most expensive proxy battle in history in the United States. The amount of money that was spent on competing on the Board slate, the company supported slate of directors vs this renegade set of directors, the activist investors, they had backing from a number of large pension funds which are huge investments including CalPERS, which is the California pension fund, CalSTRS which is the education pension fund for the state of California, New York Common Retirement Fund, a lot of big pension funds also got involved and supported the Engine No.1 Mobil. This is all about the activists believing that Exxon has not done enough, both from an environmental standpoint and from a business standpoint to move itself to carbon-neutral technology. That this is a path that seems obvious to them and if Exxon, with all of its resources moves there first, they will probably be able to compete. That is the argument and that is the theory of the case for these activist investors. Although Engine No.1 is not a big owner of Exxon, these are no mooks. It's run by a guy named Gregory Goff, who used to be the CEO of a company called Tesoro, which is a oil and gas company, he had absolutely tremendous returns. There was a senior strategist from Google X, former Chief Executive of Vestas Wind Systems. These are people who know the business. This is a really really credible group that's been put together.

Hill: Yet I'm looking at ExxonMobil stock up nearly 50% year-to-date, obviously. There are reasons for that that have nothing to do with the Board of Directors.

Mann: Oil prices definitely.

Hill: Right. Where do you think this goes over the next six to 12 months? I realize I'm asking you to look into your crystal ball, but in terms of the direction of ExxonMobil's business, what should people expect?

Mann: Well, a third board seat is a huge thing. Two are enough to be loud. Three is enough to be transformational. I think you're going to see Exxon move very quickly toward the exact thing that Engine No.1 is speaking of. In fact, you're already seeing them, they're coming out with reports of how they're going to make their upstream carbon-neutral or moving toward those targets. I think it's going to happen a lot faster. It would not surprise me. This is such a rebuke of the current management team. It would not surprise me if Darren Woods steps down pretty soon. He staked his reputation on winning this proxy battle and did not. There's going to be some changes, and if that happens, these new board members will be instrumental in picking the next CEO and management team.

Hill: Shares of FireEye are down 15% today because the company is selling its products business and its name to a private equity firm, Symphony Technology Group, for $1.2 billion. The Cloud security network and email products will go to this private equity firm. The remaining cyber forensics business is going to be called Mandiant Solutions. What is going on here? I can't recall whether it's this industry or any other industry. I can't recall ever seeing a story like this where they're not just spinning off part of their business. What is left and what would you rather be the owner of?

Mann: As we are in the studio for this, the stock is down about 15%. Basically on this news, $1.2 billion sale to Symphony Technology Group, which is a private company. I actually like the deal. I understand exactly why the shares would be down this much. Because when you're selling that big of a chunk of your business, there are a lot of shareholders who are owning your stock because of that chunk of business. It makes perfect sense to me that the market woke up today, it was like, "What I am going to do is step back because what will continue in place is not what I thought was going to be there." But CEO Kevin Mandia has been very clear about the opportunity in cyber forensics. We see with these cyberattacks that there are going to be huge opportunities and they're going to necessitate a coordinated government-led program. He wants to make sure that his company, Mandiant Solutions is best placed so that they can be a part of that conversation. I get why they would make this deal. I also get why the market doesn't seem to like it at all. But I've never seen a company sell its name before.

Hill: We've talked before about the growing opportunity in the cybersecurity industry. I think over the last few years, it has definitely moved into that category for individual investors. If you're building out your portfolio and you've got 25 stocks, I think cybersecurity is now in that category where you need to look at your portfolio and say, ''Where do I have exposure to the cybersecurity industry?'' If you don't have it, I think you should go out and find it.

Mann: Yeah, 100%.

Hill: But in this case, it sounds like within that industry, the CEO is basically saying, I'm putting all of my chips on cyber forensics and I'm going to take the short-term hit. This is where the growth engine is going to be.

Mann: Yeah, there's $1.2 billion in cash that they're going to have on hand as well.

Hill: Let me just add, for a company with a market cap of $4.5 billion, so it is not an inconsequential amount of money.

Mann: They have some firepower. They have some liquidity that they can do some things with. I think actually with cybersecurity the nature of the business, and we get asked this all the time, what are your favorite cybersecurity companies? I actually would take a basket approach and own several, or if not many of them, and think of them as one, two, or three positions in your portfolio. The reason is this, cybersecurity becomes more powerful the more players there are. In a lot of industries, if you go in as a hacker, that you only have to figure out one company's protocols, then maybe I don't know that that creates the same level of security as multiple ones with different levels of expertise. We don't ultimately know which one is going to win. This is an area where I think it is incredibly important because unfortunately, the jerk element of this world is not slowing down. They are doing some really horrible things that have cost all of us whether we know it or not, a lot of money. I think you have to be involved with the companies that are on the front line in fighting the hackers and the cybersecurity terrorists. I really don't know what you call them now, but enough is enough.

Hill: You don't know what to call them, but you appear to have some insight into how they think, which I find a little unsettling. Last thing and then I'll let you go. You talk about the basket approach, as confusing as I find this story, FireEye/Mandiant Solutions is down 15%, is this one that you look at and say, this is worthy of consideration for a place in a cybersecurity basket? Or do you want to see some of the dust settle from this move?

Mann: The answer is absolutely. I think that this company has a place. This move did not come from nowhere. This is Kevin Mandia, who is a founder of Mandiant, which was actually sold to FireEye, and then he became the CEO. This is his bread and butter. This is the company that he first founded. This is what he knows best. FireEye is a credible competitor in the space. The artist formerly known as FireEye should absolutely be something that you would consider.

Hill: That would be a better name than Mandiant Solutions. Bill Mann, great talking to you, as always, thanks for being here.

Mann: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you on Monday.