The most surprising stock of 2021 is probably AMC Entertainment Holdings (AMC -0.30%), the world's largest movie theater chain. Any objective observer would view the company as being in very dire straits; after all, AMC is saddled with billions in debt, reeling from the global pandemic, and facing a highly uncertain recovery amid the streaming revolution and compressed theatrical windows. Of course, this being the year of the meme stock and Reddit-fueled speculation, the stock is up a massive 2,350% this year.
Retail investors apparently see the stock as a reopening play and a short squeeze candidate, while also also betting their online community will keep buying and holding the stock.
That's a dubious proposition, however, as it's really, really difficult to see how AMC's intrinsic value is now worth anything close to its current share price.
Of course, given its inflated share price, AMC does have a chance to raise money to help it through this transition period and potentially transform the company. But its shareholders are preventing management from doing what it needs to do, hurting their own cause in the process.
Image source: Getty Images.
AMC pulls the plug on more share sales
On July 6, AMC filed a document with the SEC saying it would not seek shareholder approval to sell another 25 million shares at the upcoming July 29 annual shareholder meeting. CEO Adam Aron, who has taken great pains to cultivate an online relationship with his retail shareholder base, took to Twitter to say that due to the significant opposition from many shareholders to further dilution, the company would be scrapping that proposal:
It's no secret I think shareholders should authorize 25 million more AMC shares. But what YOU think is important to us. Many yes, many no. AMC does not want to proceed with such a split. So,
— Adam Aron (@CEOAdam) July 6, 2021
we're cancelling the July vote on more shares. And no more such requests in 2021. 1 of 2 pic.twitter.com/yNLhBAU5y1
Kudos to Aron for being responsive to his retail shareholders, who have already helped out the company tremendously by bidding up the stock and allowing the company to raise about $1.25 billion last quarter. Obviously, he needs to keep the retail message boards happy and AMC's stock high for as long as possible.
However, shareholders really should have approved another 25 million shares, which would have raised a significant amount -- basically another $1.25 billion at these prices, with minimal further dilution. It's a massive unforced error.
Despite massive dilution already, AMC still could use more cash
I don't think retail investors quite understand the predicament in which AMC still finds itself -- even after all the money it's raised. Although the domestic June box office has bounced back to top $1 billion for the first time since February 2020, it's still well short of pre-pandemic levels. Only around 80% of theaters are open, and the delta variant is still wreaking havoc in Europe, where AMC also owns a significant amount of theaters.
Movie theaters are a high fixed-cost business, so unless theaters are open and close to full capacity, the company will still likely be burning cash in the second quarter. Given how much it's raised and how much the company had at the end of the first quarter, AMC's cash levels are likely a little under $2 billion.
You might think that's a lot, but a look further down the balance sheet shows other hazards lurking. AMC still has over $5.4 billion in debt and another $4.9 billion in lease liabilities. Furthermore, at the end of the first quarter, its current liabilities outstripped its current assets by another $500 million, likely due to some deferred rent it will now have to pay. Those current assets have since been boosted by the equity sales, but that's a lot of liabilities on the balance sheet for a company that is still likely unprofitable.
Furthermore, one of the only ways today's stock price has a chance of making sense is if AMC can purchase other bankrupt theater chains on the cheap. But that will take a lot of capital, too. According to Deadline, AMC may be absorbing the leases of two high-traffic California cinemas, The Grove in Los Angeles and the Americana mall in Glendale, from the previous owner.
Having been to The Grove shopping center, I can attest this is a very high-traffic theater. It would be great if AMC could scoop up more leases of well-placed theaters whose owners are now bankrupt without stretching its balance sheet any further. But since shareholders have blocked more equity sales, AMC may have to leave other similar opportunities on the table.
Image source: Getty Images.
Shareholders aren't seeing the big picture
While AMC's share count has roughly quintupled since before the pandemic, remarkably, shares are trading close to all-time highs -- in fact, much higher than before the pandemic, when the company was operating at full strength. So at roughly $50 per share and more than a $25 billion market cap, AMC should be raising all the money it can at these prices to make sure it can get through the pandemic and take advantage of any opportunities that may come up. After all, the company was only asking for another 25 million shares, which would amount to just under 5% dilution at today's share count. That's really peanuts relative to the dilution that's already occurred.
But of course, some meme-stock holders may not be doing any math, or thinking about intrinsic value. Most of the commentary you read on Reddit is about solidarity in "holding the line" and "sticking it to the shorts." That kind of coordinated buying can work for a while, but as Warren Buffett's teacher Benjamin Graham once said, "in the short run, the stock market is a voting machine, in the long run, it's a weighing machine."
We don't know how long this coordinated "voting" will go on, but it won't be forever. When the bubble bursts, I think shareholders will wish AMC had another $1.25 billion in cash on hand. It's a big unforced error on shareholders' part.
