AMC Entertainment Moving Closer and Closer to the Brink

When it comes to playing the return to normalcy post-pandemic, there are well positioned “reopening” stocks (typically those who entered the last 12 month period with strong balance sheets) and there are those who were on a problematic path already (high debt levels and challenged business models) with Covid-19 making it much worse. Picking and choosing, therefore, becomes paramount. A great example of a company in the latter group is movie theater chain AMC Entertainment (AMC) . Below you will see what the company’s financials looked like as of year-end 2019, during the “best of times.” Full Year 2019 Income Statement: Total Revenue: $5,471 million Operating Expenses : $4,801 million (excluding depreciation) Interest on debt: $293 million Balance Sheet as of 12/31/2019: Cash: $265 million || Debt: $4,753 million Common stock outstanding: 104 million shares (stock price: $7.24) With less than $400 million of pre-tax profit annually, there was not a lot of room to both reinvest in the business (movie theaters require a decent amount of maintenance capital expenditures) and figure out how to reduce nearly $5 billion of corporate borrowings. Add in the fact that in-person movie watching is in secular decline and it wasn’t hard to understand why Wall Street was only giving the company’s equity a market value of roughly $750 million. And then the pandemic hit. With theaters forced to close, and no new movies being produced anyway, AMC started on a path of massive red ink. For the first three quarters of 2020, the company burned through $950 million. As you can see from above, they didn’t have enough money sitting in the bank, so they borrowed more, to the tune of $1.1 billion. And the fundraising efforts continue, with another $100 million of 15% interest debt raised this week. The writing seems to be on the wall here. With $670 million of EBITDA in 2019 and more than $5.8 billion of debt on the books now, the leverage ratio at this company (nearly 9x on a pre-pandemic operating environment) cannot continue for too long. I suspect funding sources will dry up soon, as more people realize that even with vaccines on the market, the infection rate and reopening trade will be slow, months-long events. And even if we woke up tomorrow and it was safe to go to the movies, are people really going to have in-person movie watching at the top of their post-pandemic entertainment wish list? Have we not had enough screen time in the dark, on comfy seating, inside, for the last year? It seems like the best case scenario for AMC, which is unlikely to occur, is still not that great. With the stock at $3 per share today (up from below $2 at the worst point), it is priced for the most likely outcome to be bankruptcy and that appears to the right, though zero would be the end result here. Whether it takes 3 months or a year or two, I don’t know. Regardless, when playing the “reopening trade” in your portfolios, be sure to discriminate and not just pick up the most beaten down, low priced stocks that have been hit hard by the pandemic. Instead, focus on the businesses that entered 2020 with strong balance sheets, which allowed them to raise fresh funding at good prices and not overextend themselves to get to the other side. Those are the stocks that will be best positioned whenever we get back to normal.