There's no denying AMC Entertainment Holdings' (AMC) fiscal fourth quarter was a success. Not only did revenue grow dramatically on a year-over-year (YOY) basis, but the operating loss was whittled down as well. In fact, the movie theater chain's top line for the three-month stretch ending in December marked the most sales the company's seen in a couple of years.
CEO Adam Aron was also proud to point out during the conference call that AMC is now sitting on a $1.8 billion "war chest" of cash and credit. He's not afraid to dip into it either. For instance, although at a slower pace than in the past, theater renovations continue.
If you think this so-called war chest simply materialized out of thin air, though, think again. Ultimately, shareholders are paying for it in the form of drastic dilution while higher-interest payment costs linked to a bigger debt load chip away at what little EBITDA (earnings before interest, taxes, depreciation, and amortization) remains after AMC Entertainment pays all its other bills.
There's no such thing as something for nothing
Don't misunderstand. Tough times -- like a global pandemic -- call for drastic measures. First and foremost, a company must ensure its near-term survival even to have a shot at being a long-term success. This isn't a criticism of Aron's decision to raise funds by issuing stock and bonds.
Image source: Getty Images.
It would be amiss, however, not to acknowledge the long-term impact of AMC's short-term, survival-minded fundraising.
To this end, while the theater chain may be sitting on nearly $1.6 billion worth of cash and cash equivalents and a $200 million line of credit, it's also sitting on more than $5.4 billion worth of debt while the number of issued and outstanding shares of AMC now stands at 513.8 million. For the sake of comparison, as of the final quarter of 2019, there were only 103.8 million shares of this stock in circulation, and the company was only servicing $4.7 worth of debt.
The dilution of the stock is particularly troubling; there are now nearly five times as many shareholders sharing in the success of an organization that's no bigger or more profitable now than it was just two years back. The graphic below visually illustrates just how dramatically this company's capital structure has changed over the course of the past few years.
Data source: Thomson Reuters. Chart by author.
There's a more pointed result of this capitalization shift in the wake of decisions made during and because of the COVID-19 pandemic. That's shareholder equity.
It's a rarely considered detail on corporate balance sheets, but it's a metric worth watching all the same. In simplest terms, shareholder equity is a company's theoretical net value if all its assets were to be liquidated and all its debts were repaid; stockholders would divvy up the value of whatever's left. In the case of AMC Entertainment Holdings, though, shareholder equity remains in the red -- to the tune of nearly $1.8 billion. AMC's shareholder equity stood at a positive $1.2 billion just two years back.
Data source: Thomson Reuters. Chart by author.
If you were wondering how and where the movie theater chain's owners (you) paid the price for the heavy issuance of its stock and debt when meme-stock mania was driving its price through the roof last year, this is how and where.
Time for AMC owners to ask tougher questions
None of this is to suggest AMC Entertainment Holdings is now uninvestable. The company is clearly moving out of its pandemic funk.
This information, however, should raise a great number of questions that aren't being asked. Chief among them is why a stock that's mathematically only worth about one-fifth of whatever it was worth two years ago is still trading about eight times higher than where it was trading at that point in time. Its movie-projection business certainly hasn't gotten any bigger during that stretch. It's actually gotten smaller and will remain smaller than pre-pandemic levels this year, despite the recovery underway.
A close-second question that also isn't being asked is whether AMC really can afford the $86.6 million worth of quarterly interest payments it's making now to service its debt? The business's margins were paper-thin even before the pandemic materialized. The operation certainly hasn't become more profitable since COVID-19 helped cement the at-home, on-demand video industry into place in our homes.
If nothing else, investors deserve to know where AMC's war chest came from. It's hardly free money.
