AMC Entertainment: The Numbers Don't Add Up

There's little question that when the curtain closes on 2021 in about three and a half months, this will be remembered as the "Year of the Retail Investor." Even though John and Jane Q. Public have been putting their money to work on Wall Street for more than a century, we've never seen retail investors influence the valuations of equities quite the way they have this year.

Although video game and accessories company GameStop is responsible for starting the retail investor-driven "meme stock" craze -- meme stocks are companies lauded more for the social media buzz they create than for their underlying operating performance -- it's movie theater chain AMC Entertainment (AMC 8.22%) that's become the symbol of the retail movement.

Image source: Getty Images.

Why AMC?

On a year-to-date basis, through this past weekend, shares of AMC were up 2,266%. Of the more than 8,200 listed securities on Finviz, AMC has more than doubled up the second best-performing stock in 2021.

Why the love for AMC from the retail community? The clearest answer is AMC's retail shareholders are betting on another short squeeze. A short squeeze is an event whereby short-sellers -- investors who bet that the share price of a company will fall -- seek to run for the exit and cover their positions. Short-sellers' gains are capped at 100%, because a company's share price can't go below $0. However, losses for short-sellers are, in theory, unlimited. To cover a short position, shares must be purchased. Under the right circumstances, a short squeeze can cause a very short-term parabolic move to the upside.

We already witnessed a short squeeze with AMC in late January. Short-sellers had been betting that AMC would file for Chapter 11 bankruptcy protection at some point in January. However, the company was able to save itself by selling its common stock and issuing high-interest debt. This news caught short-sellers off-guard, and shares of the company catapulted from $2 to $20 in a few days.

AMC's retail following also seems enamored with its turnaround prospects. As they frequently say on social media, they "just like the stock." As coronavirus vaccination rates rise and theaters begin releasing their backlog of potential hits, retail investors are counting on AMC's outlook to dramatically improve.

But there's just one problem: None of the numbers surrounding AMC Entertainment add up.

Image source: Getty Images.

Movie theater industry metrics are headed in the wrong direction

To begin with, the movie theater industry has been slumping for nearly two decades, and there's no indication that things are going to turn around anytime soon, if ever. This doesn't mean movie theaters will cease to exist. However, it does suggest that fewer people are choosing to go to the theater over time.

According to The-Numbers.com, annual domestic box office tickets sold and inflation-adjusted box office revenue are down 22% between 2002 and 2019. In 2002, 1,575,756,527 tickets were sold, yielding an inflation-adjusted $14,433,929,789 in sales. By 2019, the year prior to the pandemic, only 1,228,763,382 tickets were sold, with an inflation-adjusted gross of $11,255,475,289. Even with ticket prices moving precipitously higher, the movie industry simply can't keep up with a shrinking audience.

Movie theaters are seeing their exclusivity ripped away or reduced by movie studios as well. Although investors cheered the recent agreement AMC netted with AT&T's Warner Bros. for 45-day theatrical exclusivity in 2022, it should be noted that exclusivity was 75 to 90 days before the pandemic. Studios like Warner Bros. and Walt Disney have seen that streaming offerings can be quite successful -- especially when they don't have to share a percentage of their revenue with theaters. It's going to be increasingly difficult for AMC to regain 90-day exclusivity windows in a post-pandemic world.

The rally in AMC also makes little sense given how far domestic box office sales still need to go just to be on par with 2019, which was one of the worst years for the movie industry over the past quarter-century. Here's a side-by-side of weekly domestic gross sales in 2019 versus 2021 over the past three months:

Data source: Box Office Mojo. Calculations by author.

The recipe for a short squeeze isn't there

Keep in mind that it's not just the broad-based industry data that doesn't add up. The numbers behind a potential AMC short squeeze don't hit the mark, either.

While there are no guarantees in the stock market and there is no such thing as a stock guaranteed to squeeze, there are certain parameters investors can look for to signify whether a short squeeze is likely. For example, short interest is a commonly used metric to determine where a squeeze could be possible. The higher the percentage of short shares held relative to a company's float (the number of tradable shares), the more likely a short squeeze.

The short ratio, also known as "days to cover," plays a key role as well. The short ratio describes how many days it would take for all short shares to be covered. It's a function of dividing the number of shares held short by a company's average daily trading volume over a defined period, usually three months. The higher the short ratio, the more likely it is that short-sellers will feel "trapped" in their position if a stock they're betting against moves strongly higher.

Here's the thing: AMC's short interest and short ratio aren't all that impressive. As of Aug. 13, 92.42 million shares were held short, according to New York Stock Exchange reported data. That's a short interest relative to float of 18%. Yes, that's higher than the short interest of an average stock, but it's also lower than about 100 other publicly listed companies.

What's more, AMC's average daily trading volume was 112.3 million shares, as of this past weekend. That means AMC's short ratio is 0.82. Put another way, it would only take a couple of hours for all short-sellers to cover their positions if they wanted to. There's no reason for pessimists to feel trapped in their positions when the industry and company are performing so poorly, and the daily volume is high enough for them to make a casual exit, if they chose to do so.

I'll also quickly add that a number of ideas put forth by AMC's retail shareholders surrounding naked short shares, failures to deliver, and nefarious dark pool activity haven't been proved true. That's yet another knock against the short-squeeze thesis.

Image source: Getty Images.

AMC's operating performance and balance sheet suggest bankruptcy is a real possibility

Lastly, there's AMC's operating performance and its balance sheet. Based on the trajectory of the theater industry and AMC's incredibly weak balance sheet, the underlying numbers suggest it's a good candidate to file for Chapter 11 bankruptcy protection in the next five years.

Note that this type of bankruptcy proceeding doesn't mean AMC would cease to exist. It simply means its debt would be restructured to manageable levels, with debtholders getting a bigger equity stake in the company. It would, however, almost certainly wipe out the value of shares held by common stockholders.

As of the end of June, AMC had a record $1.81 billion in cash and $212 million from an undrawn revolving credit facility. That's an arsenal of $2.023 billion in liquidity. This might sound fantastic, but it's important to understand that AMC has fewer than 1 million shares left that it can issue without shareholder approval. AMC's retail investors have been unwilling to allow CEO Adam Aron and his board to authorize additional shares because they think it would somehow hurt the short squeeze potential of the stock. In other words, AMC is pretty much all out of avenues to raise cash, and it'll be forced from here to pay back its liabilities using cash.

Halfway through 2021, AMC had $5.48 billion in corporate borrowings on its balance sheet, and it owed an additional $420 million in deferred rent. To boot, it also has $4.89 billion in lease liabilities. Over the next 30 months, AMC anticipates paying $2.51 billion in lease liabilities, and this figure doesn't include the $420 million in deferred rent that must be repaid. This $2.9 billion-plus in lease liabilities and deferred rent will have to be paid in cash, and AMC has only $2.023 billion in liquidity.

To make matters worse, the company isn't close to being cash flow positive. Through the first six months of 2021, it burned through $576.5 million in cash. Even during its top-performing year, AMC never generated more than $579 million in cash from operations -- and it's safe to say it's still a long way from reaching this peak once again.

This is a company with nearly $1.1 billion in debt due by late 2026 and mid-2027 that, in all likelihood, will see between half and three-quarters of its liquidity dry up by the end of 2023. No bank is going to lend to or AMC or restructure its existing debt if it has less than $1 billion of liquidity on its balance sheet and somewhere between $9 billion and $11 billion in liabilities.

No matter how you slice the data, the numbers don't add up with AMC.