AMC Entertainment Group (AMC) continues making progress in its recovery from the adverse effects of the coronavirus pandemic. The company generates most of its revenue by bringing people together in large theaters to watch films. It all came to a halt at the pandemic onset when its theaters temporarily shut down to the public.
Fortunately, through prudent financial management, AMC survived the worst of the pandemic and strengthened the business one step at a time. Vaccines against COVID-19 are becoming more widely available, making people more comfortable visiting movie theaters. The trend, if it continues, could turn AMC's operating cash flow positive.
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AMC's business performance is improving
AMC, through minor fault of its own, has been going through cash at a rapid rate. In the first three quarters of fiscal 2021, AMC has generated negative $661 million through operating activities, an improvement from last year's loss of $772 million, but a massive loss nonetheless.
The pace of losses is improving dramatically. In its most recent quarter ended Sept. 30, AMC reported negative cash from operations of $114 million, compared to the loss of $356 million in the same quarter of last year.
Interestingly, AMC runs its business with high operating leverage, meaning a significant chunk of its expenses are fixed. Consider the rents or leases on its movie theaters; AMC incurs that expense regardless of how the business performs. So while the doors were completely closed to guests, AMC still had to pay rent. In all, AMC's rent expense in the first three quarters of 2021 was $612 million. Meanwhile, revenue has totaled $728 million at the same time.
Having a large portion of your cost structure fixed harms a business when revenue is declining. However, the high-fixed-cost system benefits a business when sales increase. That's because, while sales are growing, your costs are staying relatively flat, and the difference starts to increase profits. That's happening to AMC right now. The onset of the pandemic crushed AMC's revenue, and with it, profits and cash flow. Now, with its business recovering, profits and cash flow could bounce back.
Keep in mind that AMC is in a pretty big hole, so it could take multiple quarters of significant improvement to dig itself out. Still, the positive trend has AMC CFO Sean Goodman confident that the company could generate positive cash flow from operations in the fourth quarter.
AMC's stock price does not match business prospects
For a company struggling to stop losing money, its stock price does not reflect that reality. AMC's stock is up over 1,700% year to date on the back of enthusiastic retail investors willing to buy and hold a meme stock despite its overvaluation.
The stock was down 12% on the day following the company's third-quarter earnings release. One reason for the tepid response to its earnings announcement could be CEO Adam Aron's comments that reiterated his intentions to sell part of his stake in AMC.
