In just 10 days, we'll cross the finish line on what'll likely be another outperforming year for Wall Street. Through this past weekend, the benchmark S&P 500 had gained 23% for the year, which more than doubles up its average annual total return of 11% since the beginning of 1980.
But for some stocks, a 23% return would simply be a good day at the office. That's the way shareholders of movie theater chain AMC Entertainment (AMC -5.17%) are feeling in 2021, with shares of the company higher by 1,274%, through Dec. 19. It's the top-performing large-cap stock by a significant margin this year.
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A blueprint to AMC's historic gain
How did a movie theater chain that seemed to be on the brink of bankruptcy generate life-altering returns for its most-patient shareholders?
One clear-cut reason is a short squeeze, which occurred in late January and early February. A short squeeze is a very short-term event where short-sellers (investors betting on a security to move lower) feel trapped in their position and head for the exit all at once. To exit a short position, pessimists must buy shares to cover their stake. The need to buy shares to cover, coupled with an already rising share price, created part of the perfect storm that sent AMC shares markedly higher.
To build on the above point, AMC was also able to save itself from imminent bankruptcy by issuing high-interest debt and selling over 160 million shares of common stock throughout December and January. Short-sellers in January weren't counting on AMC being able to raise enough capital to keep the lights on. This capital raise ultimately represented the fundamental spark that trapped short-sellers.
In addition to short squeeze speculation, AMC has garnered a loyal following of retail investors who've demonstrated they're willing to buy every dip and at any share price. These folks generally enjoy going to the theater, and believe AMC's underlying business is due for a bounce as coronavirus vaccination rates tick higher and life returns to some semblance of normal in select states and countries.
I'd add that confirmation bias has been especially strong with AMC, too. Having such a large retail following owning shares and leaning on each other for support has led this large group of investors to believe that "up" is the only direction AMC could possibly head.
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What's AMC really worth?
However, with AMC hitting a market cap in 2021 that it's never come close to throughout its publicly traded history, it begs the question: What's a share of AMC really worth?
If we go by the most cut-and-dried definition, it's negative $3.20 a share!
Book value is one of many accounting metrics investors lean on to help value publicly traded companies. To determine book value, you would add up a company's assets on its balance sheet, subtract all liabilities, and arrive at a shareholder equity figure that would be divided by total outstanding shares.
As of the end of the third quarter, AMC had $11.06 billion in total assets. This included $1.61 billion in cash, $4.3 billion in operating lease use assets, about $2.03 billion in property, and $2.45 billion in goodwill. Keep in mind that goodwill is nothing more than the premium AMC paid above and beyond tangible assets when making acquisitions. If goodwill can't be recouped, it's eventually written down, which can lower the value of total assets.
Comparatively, AMC ended September with $12.7 billion in total liabilities. It had $5.45 billion in corporate debt, $5.39 billion in lease liabilities, and various other expense categories that added up to $12.7 billion.
Subtracting the latter from the former leaves $1.643 billion in shareholder deficit. With 513.3 million shares outstanding, this works out to a book value of negative $3.20 per share.
Another way to look at this figure is that if AMC sold every asset it has and attempted to repay every liability, it would be over $1.6 billion short at the moment.
Image source: Getty Images.
Multiple data points suggest AMC could go to $0
But book value is just one metric in a long list of concrete data that suggests AMC Entertainment is operating on borrowed time. Multiple data points imply that AMC could reorganize under Chapter 11 bankruptcy protection and ultimately wipe out common stockholders in the years to come.
Let's begin with the aforementioned $5.45 billion in debt, as of Sept. 30. Even with the company pushing many of its larger repayments out a few years, it's on track to pay about $437 million in interest expenses this year. That's an average of 8% interest on its outstanding debt at a time when interest rates have never been lower. The fact that it's paying a double-digit interest rate on more than half its outstanding debt should give you a clue as to how risky lenders view the business as being.
If you want additional evidence that AMC is in big trouble, look to the bond market. In November 2026 and May 2027, bonds respectively totaling $595 million and $475 million will mature (meaning they need to be repaid). As of this past weekend, the face value of these bonds, which was 100% when they were issued in 2017, was a respective 66.8% and 68.8%. Bond prices this low indicate a very real risk of default in the future. And since AMC's retail investors won't allow CEO Adam Aron to issue additional shares, the company will be required to repay this debt in cash, rather than issuing new shares to raise capital.
Speaking of cash, AMC has burned though $714.5 million in cash through the first nine months of 2021. The third quarter featured a $200 million decline in the company's available cash, and a roughly 10% drawdown in remaining liquidity in one quarter. Don't expect things to get much better anytime soon, with double-digit comp declines in box office sales virtually every week in 2021, compared to 2019.
I'd add that the movie theater industry as a whole isn't doing well, either. Inflation-adjusted box office sales have been on a precipitous decline since peaking in 2002. The rise of streaming and AMC's loss of bargaining power with major studios -- the company now touts 45-day theatrical exclusivity deals when 75-day to 90-day exclusivity was the pre-pandemic norm -- all but ensure the theater industry will stagnate for years to come.
The icing on the cake here is that any claims of Wall Street wrongdoing or manipulation presented by retail investors concerning AMC haven't proven true. They've been denied by Aron and no evidence of their existence has been substantiated by the Securities and Exchange Commission.
Unless Aron can convince his impassioned but misguided shareholders to authorize a substantial share issuance, AMC shares will probably be worth $0 within the next five years.
