AMC: No Time To Celebrate

Summary

• Management details two strong movie releases.
• Q3 box office numbers plunge over 2019 levels.
• Shareholders should just approve share count increase.

Massimo Giachetti/iStock Editorial via Getty Images

In the beginning of September, I detailed how things weren't looking good for theater chain AMC Entertainment (NYSE:AMC). The first two months of Q3 were not looking good for the domestic box office, and coronavirus cases were still rising thanks to the Delta variant. We're now in the final quarter of the year, and despite management celebrating two big movie releases, the numbers still paint a very grim picture.

Monday morning, AMC came out with a press release highlighting some past weekend company stats. Thanks to Venom: Let There Be Carnage in the US and No Time To Die (the latest James Bond movie) in the UK, the company saw its best performance since the start of the pandemic. CEO Adam Aron celebrated this milestone and took a shot at the company's skeptics:

Aron added, “The success of these two new blockbuster movies, and of our theatres both at home and abroad, demonstrates the huge pent-up demand we see in moviegoers who are ever so eager to return to movie theatres. To the self-proclaimed sages who routinely and mindlessly predict the demise of cinemas, it is my view that it is simply wrong to underestimate the enormous consumer appeal and resilience of movie theatres.”

It was rather obvious that at some point, moviegoers would return. Theaters were not going to remain empty forever, but pandemic fears and a shift to some movies being sent directly to streaming services have not helped. The problem for AMC is that before this major weekend, the domestic box office had another horrible quarter in Q3. Take a look at the table below showing a comparison of movie grosses as compared to their 2019 counterparts.

(Source: Box Office Mojo stats, seen here)

I bring up these numbers again because AMC management is on the record saying it will get to positive theater level cash flow in Q4 with a domestic cumulative box office this year of $5.2 billion. Through the first nine months of this year, Box Office Mojo pegged the total number at $2.4 billion. This means that the final three months of this year need $2.8 billion in movie grosses to hit that 2021 yearly mark.

In Q4 2019, the domestic box office total was just under $2.89 billion. For this year to then hit the $5.2 billion number, we can only see Q4 this year down 3.2% as compared to Q4 2019. How is that going to be possible when we just came off a September that was down nearly 47% over 2019 levels, and a more than 51% drop for all of Q3? Don't forget that AMC has raised prices quite a bit since 2019, so actual attendance numbers are actually even weaker than gross ticket sales numbers. That provides other headwinds like reduced concession sales, which are the higher margin part of the business.

Venom and No Time to Die will help the situation a bit, and AMC pointed to movies like West Side Story and Spiderman still coming out this year. The problem is that Q4 2019 had blockbusters like Joker, Frozen II, and Star Wars: Episode IX - The Rise of Skywalker. Even if the international business does fairly well and the domestic box office doesn't completely stink in Q4, I just don't see how AMC gets anywhere near positive theater level free cash flow during the current quarter.

The company may get some further concessions from landlords, but it still is several billion in the hole when it comes to its cash position. Last week's small debt repurchase will reduce future interest expenses, but that took away $41 million plus from the current cash position which will be shrinking moving forward. With Q1 usually being a seasonally weak quarter, there's no guarantee currently that AMC can get to theater level positive cash flow in early 2022. Remember, that metric excludes a bunch of corporate level expenses, which means getting to company wide positive free cash flow is still a major unknown.

I mentioned in a previous article that the stock's price to sales multiple had expanded roughly 30 times over since Covid began, and obviously the valuation here is extreme. While the average price target on the street has roughly tripled from its pandemic low, the current value of $5.44 still implies massive downside from current levels. Shares still go for more than 3.8 times expected revenues for 2023, as compared to the 0.14 times 2019 sales they finished trading that year at, and that two years out analyst average estimate includes revenues more than doubling from this year's expected level.

In the end, AMC may be celebrating a couple of good movie starts, but the overall box office remains quite weak. It will take a massive Q4 for the company to get to where it needs to be for positive theater level cash flow, something that seems nearly impossible given Q3 box office grosses. I'm not here today to say that AMC is going bankrupt, but the company will need additional capital moving forward. Shareholders will likely need to give in and accept some dilution next year by approving an increase in the share count, or they will be helping to speed up the potential demise of this name.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

Comments

[Ed Grey]

The stock is priced as though it's a premier cloud security company with a fast-growing customer list.

[MG007]

I've been celebrating ever since I bought AMC at $9, thank you.

These so called analysts have been getting their butts handed to them by AMC for the past 300 days in-a-row. $40 has been the normal for so long that they're popping corks when it's down to $38. I've kept about 20% of my initial AMC investment because this underdog story just keep on giving, and AMC is truly more gratifying to own than most my other stocks.

Who doesn't love a great underdog story. Perfect for AMC and reason to own a bit, just not your life savings. Personally, I think there are a lot of Disney/Amazon type companies that would love to get their hands on AMC. They have hardly any debt payments till 2025 (I mean, Trump could be in his 2nd year right?), and by then a deal probably would be made before any bankruptcy.

I can't imagine anyone still carrying their short position when AMC was under $10, or even staring one for that matter...

[anderdan11]

@MG007 first the stock popped to 72.00 for one week and has been on a steady downtrend since. Bears continue to make money from the fall and selling out of the money calls.

Second, just want to make sure you realize AMC does in fact need to make roughly 350 million per year in debt payments now. The total balance is due in 2025 I believe.

Finally, congratulations on your great investment and on getting out with a profit; I am sincerely happy for you.

[Energy Alpha]

@MG007 no company is going to acquire AMC at this inflated price when they could buy one of AMC’s competitors for a fraction of the cost (CNK market cap is $2.5 bln vs. AMC $20 bln) or build their own theaters for a lower cost than a purchase of AMC. AMC share price would have to drop back down to single digits to make it attractive as an acquisition target.

Using the investment premise of “acquisition target” falls apart when share price gets dislocated from reality.

[Steve Fischer]

@MG007 UMM you posted several times in June that in a few days it would be at $100-- you're both dumb and dishonest.

[Jamie Samans]

Here's my question for the AMC enthusiasts. Let's assume you bought at $5. The stock hit $70 and you didn't sell, despite looking at a 14X return. Okay; you figured it'd go higher. Got it.

But then you bought MORE at $35. Why? Even if the stock were to go over $400 a share, those shares you bought at $35 wouldn't have gained as much as the 14X you already turned down.

Well, I have a suspicion on why you did it.

I hear a lot of excitement, and a lot of bullying and outrage over people who aren't hyping AMC every day of the year, but how much money did you really put into this? A few hundred?

If you had $10,000 in AMC from $5 and didn't sell to lock in the gains in the $60s once it became clear it was coming back down, then that's pretty crazy. If you didn't sell at $35 to lock in the $50K+ in profits, that's pretty crazy. Those are noteworthy profits. That's quite a lot of money for someone who put in $10K. Now take that up a notch and say you put in $100K. Those same decisions would have meant not taking over $1M off the table in the $60s.

I don't think so. Most of you who are so very pro AMC, the Ape-y-ist of the Apes, probably have a few thousand dollars invested at most, and I'm guessing you had a lot less -- $500 or so -- from the early days. You didn't sell your $500 stake when it hit $8000 because, let's face it, even though that's a big multiple, $8000 is only so much money. But then maybe you dug deep and bought $1000 or $2000 more at $35. Now you have a notional value of $5000 in the stock, and you're hoping for a jump that would bring a new chance to sell at 10X or 15X *that* number. You'd take your $50K and go.

And you know what? That would be a good idea. Long term, AMC will not maintain its levels, and the potential for new short squeezes are pretty much done. There will be no news to rally the stock because AMC was unprofitable before the pandemic, when revenues were higher and interest expense was far, far lower than it is now. AMC will probably survive, because streaming is a profit-killer for the studios and they're gradually realizing that, but nothing is going to happen to take AMC to $500 or $1000 or whatever. If it did, when the naked shorts you dream of couldn't cover, the result would be their bankruptcy and the collapse of the price for lack of buyers, followed by Congressional hearings and lawsuits.

But the bottom-line point here isn't AMC's trajectory. It's the underlying secret of the Ape community: I think most of you have very, very little invested in AMC. You stay because you put in so little that even 14X returns aren't enough to change your real, day-to-day lives. If you'd put down $50K at $2 and had a chance to walk away with well over a million dollars, you'd have done it, like any normal person.

[Gestalt Capital]

@Jamie Samans I agree with nearly everything you said except that streaming is a profit killer for studios. Streaming has provided the studios with a high margin recurring subscription revenue stream and a direct outlet for content. I still think theaters are part of the profit maximization equation for studios (exclusivity for first-run content is not going away), but the balance of power is with the studios. This makes the movie theater industry an average one at best given the prospect for uninspiring returns. I still don't get why investors hold AMC rather than CNK if they like the movie theater business. CNK is a better short squeeze candidate, has a better valuation, cleaner balance sheet, and has generally outperformed AMC on return on capital.

[Jamie Samans]

@Gestalt Capital I see three problems with streaming.

The first is that a subscription-only model means that the content you create is designed to keep people anchored, not to bring in any new revenues, but top talent expects profit sharing. For all of the movies Warner sent directly to HBO Max, they had to pay bonuses calculated as if the movies did well, but that came out of those subscription dollars, which were flat for anyone who'd already signed up and didn't exist at all for someone who joined just to cancel at the end of the month. Where a studio produces more than one film per month, the very same flat revenues are shared across costs from multiple movies.

So, that's a challenge. It can be offset with a premium-pay model like what Disney used for Black Widow, and Disney helpfully told us that some $60 million came in from Disney+ rentals. There is some cost associated with promoting digital releases, but my understanding is that a studio keeps significantly more than with theatrical releases -- 85-90% versus 50%. So, let's go with the high number and say Disney got $54 million. It then had to pay $40 million of that to settle a lawsuit from its star, who lost out on revenue bonuses that would have come from theatrical release. Net $14 million -- not great.

That brings us to Problem Two: there is a cap on steaming revenue that doesn't exist in theatrical releases, which is that one payment covers an arbitrary number of people who are present to watch it. At $10 a ticket, a studio makes $20 on a family of four, but it makes $30 if the kids each bring a friend. Released digitally, the $30 charge for Black Widow means the studio gets $27 (before adjusting for lawsuit impact), even if it's just one person watching. Awesome! BUT -- the idea of paying to watch a movie at home creates a sense that people SHOULD come over to see it with you. Larger rooms, larger screens = larger audiences, all for one fixed price. Home movie clubs can even form that pitch in to cover the cost, driving down the per-viewer rate from what those same clubs would have paid to go to a theater. Eventually, theaters pressured that way will make their private screenings formal temporary leases where viewers can get the theater for $100, buy snacks on site, and use their own credentials to pay $30 and see the latest movie with 60 friends. ;-)

This might sound far-fetched, and it would be a minor issue except for Problem Three: digital releases provide top-quality pirated content on the very moment they go live. There is nothing that can be done about this, because the endpoint connection where content moves from the network to the arbitrary display output of the television MUST be a point where content is decrypted. That means it can be captured by an intermediary device, saved in real-time, and uploaded for distribution. There are already numerous sites that look and feel like Netflix or Amazon Prime but link viewers to pirated content. People who might have balked at watching a handheld capture from a camcorder or phone shrug and watch because, well, the studios make their stuff available for free anyway, so what's it matter?

That's basically my thought process on streaming. It's not that it brings in no money; clearly, it does. It's that using theatrical content to keep people as subscribers is money left on the table, versus having it debut on the service 45 or 90 days later.

[Gestalt Capital]

@Jamie Samans Those are all excellent points. I would note though that pirating has been issue for content producers for quite some time. The music industry found a way to largely end it. I'm fairly confident that the movie industry can do the same. I'm not as convinced as you that this is going to stop studios from pursuing streaming strategies. The "cap" on streaming revenue isn't a cap. There are still millions more people the studios can add to their service and as you point out, they can now upcharge for access to the newest content. I don't view lawsuits as a recurring problem as talent contracts will adjust to the new streaming reality. Your point on lost ticket sales is a valid one. It's the reason why the most popular blockbuster movies will still go exclusive to theaters. The challenge for theaters are the mid-tier releases. A perfect example, I didn't want to go to the movie theater to see Free Guy so I waited until it was available for purchase (only 45 days after the release). That's the real problem for theaters. You don't have to wait that long to get access to movies you kind of want to see. Plus, now I can watch it again whenever I want vs. spending $40-50 at the theater and having to pay again if I want to own it.

[amc1234567]

I have been seeing crap like this since AMC was at $6 in feb. It is now +600% from that price

[anderdan11]

@amc1234567 I have been seeing crap about a MOASS for the last 4 months as the stock has dropped 50%.

[Gestalt Capital]

@amc1234567 Investing using a rear view mirror almost always ends in disaster, but hey, good luck with your approach.

[Outcast_Searcher]

@amc1234567: And it's about half of what it was at the top in early June, and trending down over time, DESPITE the endless litany of Youtube pumpers (selling clicks and spewing utter nonsense).

So what's your point?

[Energy Alpha]

I can feel the MOASS coming any day now. I saw it on YouTube so it must be true…

[Outcast_Searcher]

@Invest ATX: It's on Youtube MANY times a day, backed up with hype, hysteria, emotion, and conspiracy theories.

What could possibly go wrong for naive "investors" and speculators? /s

[bottomupanalysis]

@Michael Bryant MB, Can you repost your prediction on when and how high AMC will go. Can't find it. Did you delete it?

[Michael Bryant]

@bottomupanalysis

If it was deleted, it wasn't me who deleted it. I rarely delete anything I post. If I remember correctly, I said that I believe $AMC will hit:

Low target: $60/share (resistance)
Medium target: $125/share (Elliot Wave theory)
High target: $260/share (resistance)

The latest technical graph says $AMC will oscillate between $29/share and $47/share till about November 6 (one month) and then surge to $335/share by December. www.youtube.com/...

[Gestalt Capital]

@Michael Bryant But where will it be on November 4th? You really think AMC will have a market cap approaching 200B? Current comps and historical value suggests that movie theaters trade at .8-1.2x EV/Sales. Based on that value, AMC's market cap implies the company is as valuable as the entire movie theater industry in the US. Just saying. I know you can say this is not fundamental, but that's a lot of additional capital that needs to come into the name to support that kind of valuation.

[Outcast_Searcher]

@Michael Bryant: In the real world, technical analysis is so useless that there's NO evidence it produces above market returns after trading expenses.

If it worked, active mutual funds (with lots of money for research) wouldn't be outperformed by efficient index funds 80% or so of the time, with a growing advantage over longer time periods.

[Buyandhold 2012]

Another James Bond movie being released this week.

I'm psyched.

[Neversell 2016]

@Buyandhold 2012 Daniel Craig really is one of the best bonds. Him and Connery are my favorites. Are you interested in AMC stock at all, though?

[mikeely]

@Buyandhold 2012 It should be an amazing movie. I'm not sure that it will have enough box office revenues to get AMC to theater level breakeven in 2021 though...

[Jamie Samans]

@mikeely that's easy: it won't. AMC lost money in 2018 and 2019, on higher revenues and lower interest expense. Endgame didn't bring it to breakeven.

[Montresor]

The rise and fall of AMC is one of the more curious episodes in stock market history. It will be written large on the financial tombstone of many a gullible neophyte investor.

[Outcast_Searcher]

@Montresor: And when it happens, they'll have lots and lots of things to blame -- except themselves, of course.

[Moomoo22u2]

Enough has been said on both sides. I say if your’e inclined push all in on AMC and hope for the best. Margin to the hilt and try to squeeze someone or some phantom institution out there. It’s just money.

[Clark158f1]

Apes can't read so all is well......

Hoping for a good pop to reshort.

[anderdan11]

@Clark158f1 you mean more than the 25% trough to peak bounce last Thursday?

[Outcast_Searcher]

@anderdan11: Ah, reality and math.

Thursday Sept. 30th, AMC had a low of $33.74 and a high of $41.78, per Yahoo Finance.

First, the $8.04 difference is less than 25% of $33.74.

Second, what are the odds someone could buy at the low, sell at the high, or both?

[MrSir]

There is a YouTube video saying hedge funds and BoA will go bankrupt as a result of short-selling AMC shares (not able to cover). If that is the case, shouldn't we just buy AMC at $36.75 and sell at $100 or higher?

[Energy Alpha]

@MrSir if you believe the YouTube video then short BoA

[Gestalt Capital]

@MrSir You might want to do some more due diligence before shorting BAC and going long AMC.

[DBek]

@MrSir I think you need to re-evaluate your investment strategies in order not to lose your money outright. Due diligence is the key to investing, whether or not you're seeking a long or short position. A youtube video is far from due diligence given by bofa and amc are public entities that disclose a ton of data.

[Nicholsenb_00]

80% of the float is owned by retail traders. With over 4.1 million individual retail share holders. Why aren’t most selling?

[Andrew Shapiro]

@Nicholsenb_00 individual retail investors actually have a longer term investment time horizon than most institutional investors - average mutual fund's holding period is only around 9 months!

[kenberthiaume]

@Nicholsenb_00 that was 5 months ago. Why hasn't Aron updated the count? Probably because it wouldn't look as good. People get bored with stocks that aren't going up all the time and sell.

[bbeltkyle89]

@Andrew Shapiro

Do you think that statistic is the same regardless of amount of investable assets or what avenue they are investing in? Id imagine the holding period of higher net worth retail investors using their 401k, roth, ira etc is dramatically different than the ones using Webull, RH, public etc.

[OverTheHorizon]

Box office numbers have not “plunged”:

seekingalpha.com/...

[mikeely]

@OverTheHorizon You read the chart above for Q3 right?

[OverTheHorizon]

@mikeely Q3’s over. did u get a chance to read article link?

[Andrew Shapiro]

@OverTheHorizon @Bill Maurer's comparisons are to 2019 pre-pandemic quarterly period not to either pre-pandemic single movie comparison or comparison to other Covid era box office figures. The point was what is required for the full year 2021 to close out in comparison requires a meet or beat of 2019 q4 and that will NOT be achieved. Whether those long $AMC care about any of that fundamental information or do care but have a longer term view and are encouraged by the obvious trend that movie going is coming back is a far different story. I do contend there are far more undervalued ways to play that longer term rebound than AMC, namely Reading International $RDI, which has not even joined $CNK, $IMAX or $MCS rally because it has minimal sell side analyst coverage to sing its praises vs these others.

[Ubersapience]

The problem is not the mediocre fundamentals, but the excessive naked shorting taking place

[bottomsupinvestor8]

@Ubersapience Its hard to argue that the stock is artificially held down. The stock is at historical highs by every metric and sales multiple over 25x that of 2019. If anything, the longs tried to manipulate the price with out of the money calls, gamma squeeze, etc. The longs talking about naked short selling and other conspiracy theories keeping stock down is laughable given the egregious valuation.

[Platypussy]

@Ubersapience which by what twisted logic explains why short shares are plentiful and cheap to borrow ??

[Energy Alpha]

@Ubersapience is that what you heard on YouTube? You forgot the part about FTDs and dark pools. If you’re going to sing conspiracy, sing all the verses.

[Teufel hunden 1968]

This is AMC, Land of the Apes. It's no place for your logic and reason! The Apes are going to start referring to you as an "infidel".