Bear Of The Day: AMC Entertainment (AMC)

Entertainment

Bear Of The Day: AMC Entertainment (AMC)

Editor2

August 28, 2020

Bear Of The Day: AMC Entertainment (AMC)

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The movie industry is in duress, and theaters are getting the brunt of the blow. The movie theater space has been suffering for years as many consumers favor streaming from the comfort of their own homes to making the long trek to their local theater.

AMC has been fighting this trend with everything they have, including a subscription-based offering. The pandemic may have put the nails in the coffin for this seemingly dying movie theater giant. Analysts have been slashing their EPS estimates to a deeper bottom line deficit for years to come, pushing AMC into a Zacks Rank #5 (Strong Sell).

Movie theaters are treading water in the video streaming economy today, hitting the media segment like a tidal wave. Subscription streaming services like Netflix (NFLX), Amazon Video (AMZN), Disney+ (DIS), Hulu, HBO Max (T), and Peacock (CMCSA) keep providing more and more content for seemingly unlimited viewing pleasure. There is no longer a necessity to go to the theater for entertainment, with the explosion of new streaming services completely disrupting the space.

Those film connoisseurs are still out there who want to see every movie right when they hit the silver screen, but they don’t need AMC massive empire of theaters to do so. There are enough local arthouse and boutique theaters to meet recently niched consumers’ needs.

AMC hasn’t posted an annual profit (on an adjusted basis) since 2016, and every year it seems to be falling deeper into the hole. This pandemic may have been the straw that broke this theater chain’s back with all its locations forced to shut down temporarily.

This movie giant, unsurprisingly, had its worst 6 months in history this year. It illustrated massive topline declines and a 2-quarter deficit of $2.7 billion, which almost quadruples all of the enterprise’s annual profits combined (at least since 2013 when the company went public).

AMC has been fighting to avoid bankruptcy throughout the first half of 2020, renegotiating almost all its global leasing terms and raising $500 million in a desperate bond issuance. These bonds were not only first-lien secured but yielded investors 10.5%, not to mention being sold at a discount of 98 cents on the dollar. These were extremely unfavorable terms for this theater chain, but this extremely unfavorable economic climate forced their hand.

These bonds’ value slid significantly in the months that followed its issuance as its rating fell deeper into probable default territory. AMC’s bonds are currently rated Caa3 on Moody’s scale, meaning that default is imminent with little prospect for recovery.

AMC shares boomed over 16% yesterday as speculative traders look for a reason to buy this seemingly “cheap” stock as the chain reopening an additional 170 locations. I wouldn’t touch this stock with a 50-foot pole.

This stock currently has no buy ratings and is trading 78% above the average price target. It’s being valued at 30% more than even its most optimistic target. Beware of these toxic shares.

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