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This Scenario Could Cause AMC's Earnings to Jump Sustainably

By Parkev Tatevosian - Jun 28, 2021 at 9:14AM

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Intentionally or not, retail investors are helping improve AMC's fundamental prospects for survival.

These days, AMC Entertainment Holdings (AMC -0.94%) is known more for being a meme stock than any other of its attributes. Retail traders posting or reading posts on Reddit trading forums apparently chose to buy and hold the stock to counter hedge funds betting that AMC's stock price would go down in a move commonly referred to as a short squeeze. The Reddit crowd is winning the battle so far. AMC's stock price is up roughly 2,450% year to date.

AMC's management has been smart to take this pricing opportunity and sold new shares at the elevated pricing to help raise much-needed funds. This had already helped it survive the most acute phase of the pandemic when all its theaters were closed to viewers, and the company was bleeding cash. It plans to use some of the new funds to help pay down the debt it accumulated during the pandemic.

But this battle between Reddit traders and hedge funds is creating another opportunity for AMC -- to raise enough cash to boost earnings in the long run. 

Customers ordering food and drinks.

AMC's stock price is up over 2,000% in 2021. Image source: Getty Images.

Uncomfortable position 

AMC management has already approached the maximum number of shares it's authorized to sell to raise equity. If it wants to sell new stock, it needs to get shareholder approval. Management is aiming to do just that. One of the proposals it brought forward at this year's shareholder meeting is an authorization to sell 25 million shares. At today's closing price of $54.06, the sales of 25 million shares of AMC stock could raise $1.35 billion.

Debt has been a problem for AMC even before the pandemic. Interest expense at times exceeded operating income. Debt could be an even bigger burden as the company borrowed at higher interest during the pandemic. In the most recent quarter, AMC reported an interest expense of $150 million. Annualized, that would be $600 million and more than double the interest expense of $292.8 million in 2019.

To put that figure into context, AMC's operating income for 2019, 2018, and 2017 was $136 million, $265 million, and $102 million, respectively.

Folks watching a movie in a theater.

Image source: Getty Images.

What this could mean for shareholders 

If AMC shareholders vote to authorize the additional share sale, and management subsequently uses the money to pay back high-interest debt, it could fundamentally improve AMC's earnings potential. As of March 31, AMC had $5.4 billion in debt. The estimated cash raised in the equity sale of 25 million shares could pay back 25% of its debt, potentially decreasing interest expense to below pre-pandemic levels.  

Furthermore, if retail traders maintain their enthusiasm for supporting AMC, they could vote for even more share sales, which could be enough to pay back all $5.4 billion of the company's debt. That would remove the biggest thorn in AMC's side, as its interest expense is close to surpassing its rent expense. The difference is that rent is paid on theaters that allow the company to generate profits, whereas debt is unnecessary for AMC to provide service to patrons.

In that way, AMC shareholders have the power to fundamentally improve the company's long-term financial health and earnings prospects. It remains to be seen if the investors will choose to do so. The last day of voting is July 28 and the annual shareholder meeting is scheduled for July 29. 

 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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