What happened
Shares of movie theater operator AMC Entertainment (AMC -3.25%) plunged 37.4% in August, according to data from S&P Global Market Intelligence.
It was quite an interesting month for AMC, which reported earnings, saw a competitor say it was probably going to declare bankruptcy, and then issued a new class of preferred shares with identical properties to its own shares. But will this meme stock investor favorite be able to survive a slow summer movie slate?
So what
In early August, AMC posted second-quarter earnings that showed a better-than-expected loss, although the company did miss on revenue. Yet even though bottom-line profitability was better than expected, AMC still burned $117 million in cash, because of high interest payments and capital expenditures.
Unfortunately, these numbers came in during a quarter with several box office hits, most notably Top Gun: Maverick. Meanwhile, the summer move slate is emptier, so those cash burn numbers could get worse. In fact, AMC's largest competitor, Cineworld (CNWGY) (CNNW.F), plunged last month after warning authorities in Europe that it may have to declare bankruptcy.
While AMC isn't going bankrupt in the near term, it still has a high debt load and just under $1 billion in cash. However, since AMC's stock price has been held up by meme-stock traders, it also has the potential to raise more money and survive. The only problem? Management promised its shareholder base about a year ago that it wouldn't dilute them any further.
To get around this, AMC launched a new class of preferred shares under the name AMC Entertainment Holdings (APE), which began trading under the ticker APE on Aug. 22. These new shares are technically identical to AMC common shares, except they're labeled as preferred shares.
That seems to be an end-around move relative to shareholders, and it sets AMC up to potentially raise more money in a "preferred" equity sale. CEO Adam Aron basically said as much in the announcement for the preferred shares earlier in the month: "This new AMC Preferred Equity gives AMC a currency that can be used in the future to strengthen our balance sheet, including by paying down debt or raising fresh equity. As a result, this dramatically lessens any near-term survival risk for AMC, as we continue to work our way through this pandemic."
When AMC issued the new preferred shares in a special dividend on Aug. 22, some of AMC's value went to the new preferred shares. That explains most of the drop in AMC's price; however, to get a "real" value for the whole company, one should look at the values of each class of stock combined.
Now what
What is strange at the moment is that AMC common shares trade at $8.88, while the AMC preferred shares trade at $4.97. Even though one is common stock and one is preferred stock, they are essentially identical claims to the same business. While APE shares may trade lower because the company may issue more APE shares in a stock sale, any sale would dilute AMC common shares by just as much.
Noted short-seller Jim Chanos recently revealed he has made a pair trade, buying APE shares and selling short AMC shares. That of course makes lots of sense, since their value should converge over time; still, as anyone familiar with meme stocks knows, share prices can go all over the place, leading to potential short squeezes or other trading and liquidity challenges. So there is a risk in making this trade, even though it should work over the long term.
Over the long term, investors long AMC stock really need the movie theater industry to bounce back and generate better profits and cash flows. Given today's high inflation and interest rates, as well as the huge amount of content available in at-home streaming, that may be a tall task. The stock remains appropriate for meme-stock speculators only.
