AMC: The Critical Number Too Many Are Ignoring

The theatrical industry outlook is still bleak

While Adam Aron, AMC Entertainment Holdings' (NYSE:AMC) CEO loves to tout the latest blockbuster release, theatres worldwide cannot survive on just blockbuster films alone. Despite a great slate of hit films post-pandemic in 2022 and 2023, the bottom line for operators is just not improving fast enough.

Cineworld Group plc, one of the largest theater operators in the world filed for Chapter 11 last year. The U.S. Bankruptcy court approved the company's post-bankruptcy plan last month. Cineworld operates theater chain Regal Cinemas here in the U.S.A. As part of the plan Cineworld will cut $4.53 billion in debt, wipe out existing shareholders, and transfer ownership of the company to its lenders.

How long will it be before AMC suffers the same fate? If we take a serious look at the numbers, I believe Adam Aron may be forced to take his company down the same path as Cineworld before the end of the year, possibly as soon as Q3 of this year.

Here is why I see this as a real possibility. Let's look at a graph of AMC's annual gross revenues and net income from 2017 through 2022.

(source: AMC financial reports.)

From 2017 through 2019, before the pandemic, AMC's revenues were cruising along above $5 billion per year. Then the pandemic hit. Theaters had to shut down in early 2020 and did not reopen until the spring of 2021. 2022 was the first full year of operations since 2019. But as we can see in 2022, revenues were still down over $1.5 billion or 29% from 2019.

The bigger problem has been, and continues to be Net Income. As shown in the charts above and below net income has been at, or barely above, break even dating all the way back to 2014. The company's net income plunged in 2020 at a time when the company was low on cash.

By the grace of the "meme" stock craze in January 2021, AMC's cash position rebounded with the sale of millions of additional shares pumping up the cash position to nearly $2 billion that year on the backs of new, small investors driven into believing that a "MOASS" (mother of all short squeezes) was imminent. Two and a half years later it still is nowhere in sight.

This belief in an imminent short squeeze was based on unfounded rumors of millions of "naked" short sales of AMC stock. This is selling shares of a stock you do not own. That promise of this condition that could result in sending the stock price up to $1,000 or as much as $100,000 per share is what drove this small army of investors known as "Ape"s to divert their paychecks into AMC shares. Unfortunately, this condition of naked shorts has never been proven to exist. But it helped sell a lot of AMC shares to enthusiastic novice investors.

Since the height of the "Meme" craze, the cash has continued to burn down every quarter. For the first time since the end of 2020 cash and equivalents fell below $500 million as you can see in the next chart.

Now you may ask why is this a problem if the cash on hand was very low between 2014 and 2019? During those years the net income losses were very small while revenues were very high, as you can see in the top chart. But when revenues decline, you do not have as much cash moving through the company. That can put pressure on timely payments.

Further complicating the situation is the expansion program Adam Aron started in 2016 increasing the total number of theaters. In doing so, AMC took on huge amounts of debt. Then came the pandemic and AMC borrowed $billions more to keep the company afloat.

In the next chart below, you can see how the quarterly debt payments have tripled since 2017. Despite a reduction in total long term liabilities starting in 2021, quarterly interest payments continue to increase; up to $101.1 million in 1Q23. That's an increase of $8.7 million QoQ from 4Q22. So reductions in debt are not slowing down the increasing costs of carrying $billions in debt.

What is ahead now?

I do not see any growth in revenue to boost the totals to the numbers in 2018 and 2019 in the foreseeable future. Despite all the new hit films so far this year, box office numbers are still not improving by much over 2022. The numbers in the next chart cover the first quarter of 2023.

April 2023 had a domestic box office of $900 million, just $134 million lower than 2019 thanks to the power of the Super Mario Bros. movie. May 2023 dropped to $773.9 million which lagged 2019 by $304 million. It's too early in the month to get a bead on June.

(source: Box Office Mojo and AMC financial reports)

But what is clear is the second quarter of 2023 will be another net loss for AMC. Investors are hoping for some sort of a bailout with the conversion of AMC's convertible preferred shares (APE) into common shares. Tied to that event is a 1-for-10 reverse split to boost the stock price. The reverse split approved by shareholders in an April vote is a very bad idea in this author's opinion. One of the main reasons so many small investors bought into AMC shares was the low price point before the jump in June 2021 when the shares closed at about $60. Some took their profits and moved on. But in reading postings in different forums like Reddit, many Apes are still holding onto huge losses and refusing to sell.

The jump in price in June 2021 was fueled by the "MOASS" everyone thought was starting. It however rapidly fizzled and the stock price has been in decline ever since. It has had a few upward spurts in price in the last 2 years but each one was lower in price and very short duration.

The low stock price continues to attract current small investors trying to lower their average cost per share. Driving the price back up to 10x times the current $4.59 with the expected reverse split could force small investors to stop buying shares. That is something AMC will desperately need to try to replenish their cash coffers. But I fail to see why anyone would buy more shares at 10 times the current price when net income continues to be negative. I can't see new investors being willing to continue to feed the AMC cash firepit. If AMC was barely profitable once in a while pre-pandemic, today's higher interest rates on their debt and costs of doing business would require revenue levels ABOVE 2019 at a minimum to hope for breakeven or a profit.

Some readers may be wondering about the Writer's Guild strike now underway. It will not have any effect for a year or more. Film scripts are written years before pre-production even begins in most cases. Television is a completely different thing. The strike will have immediate effects on those shows. But not films.

What to do

The net drop to cash in 1Q23 was reported as $135.9 million. Unless Adam Aron can stop the bleeding AMC will run out of cash by year-end. The drop in cash and equivalents from June 30, 2021 when it was at $1.811 billion to under $500 million now should be alarming to any investor. But companies like AMC cannot wait until cash completely runs out to take action. Companies like AMC need cash to continue operations while going through the Chapter 11 process. I believe AMC would have an excellent chance of survival after Chapter 11 for several reasons. First, all debt gets renegotiated. Second, current shareholders get wiped out making room to raise fresh cash from new investors. After being able to get the debt burden off its back AMC, under new management, should flourish just as I expect Cineworld to do.

With the odds growing rapidly that AMC may have to file for Chapter 11 protection, this author believes it would be a terrible idea for current investors to sink any additional funds into this stock, or for others to consider buying shares until after the company exits a Chapter 11 filing.