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At the beginning of the year, I published “AMC Entertainment: Unlikely To Survive 2023, Even If Movie Ticket Sales Fully Recover.” At that time, I believed that AMC Entertainment (NYSE:AMC) would reverse the rally at the beginning of the year and likely face a liquidity crisis later this year due to its financial deterioration. Since then, the stock has lost roughly 86% of its value and is now trading at its lowest share price. All of the gains made during the COVID-speculation “meme stock” rally have now evaporated as the company remains potentially on the verge of further deterioration.
From a revenue and operating income standpoint, AMC looks much stronger than a year ago. As long as ticket sales remain near their current level, I believe the company should continue to generate a positive operating income. That said, its extremely weak working capital remains an issue and points toward more significant interest expense issues and potential liquidity risks in 2024. See below:
In Q3, not shown above, the company had a positive operating income of $99.6M with $1.4 in revenue. Thus, it has seen continued improvement, but not necessarily by enough to restore its long-term outlook.
The company’s performance in 2024 will depend on many factors. One external factor will be economic headwinds or tailwinds altering ticket sales. While the company is doing much to change its strategy to maintain decent margins, much of its risk remains beyond its control. Further, its ability to restore its liquidity position will largely depend on investor sentiment. At this point, AMC could maintain its stock price if it can navigate this challenging financing environment. Still, I do not believe the company will recover most of its 2023 losses due to its chronic need for external financing.
Strong Sales will Not Fix the Balance Sheet
As expected, AMC has had a relatively strong year regarding ticket sales. Over the summer, the company had its best week in history following the release of the “Barbie” and “Oppenheimer” movies. Its Q3 sales were the best third quarter prior in over one hundred years. While the firm’s TTM revenue is not as substantial as in 2019, its sales are still above their average in the late 2010s.
The company, and many analysts and investors following it, point toward filmed concert tours this quarter and over the following two years as a significant sales promoter. However, in my view, contrary to the opinions of many, AMC fundamentally is not struggling with a lack of sales but the general failure of its core business model. Further, given its high debt level and heightened interest rates, the company is now paying the toll for its aggressive acquisition program in the 2010s. AMC is finally looking as if it may generate consistently positive operating income; however, its interest expense level remains far too high, and it seems the firm may need to restructure its financial position. One possibility could be immense equity dilution to reduce its debt load and restore liquidity, as we’ve seen this year.
In my view, AMC has effectively failed from the standpoint of 2022, given it lost the vast majority of its equity value. At this point, the firm may or may not eventually need to declare bankruptcy, depending on its ability to raise external equity capital and maintain a positive operating income. Economic demand has benefited the company by improving its sales, but a shift in consumer winds may reverse that trend in 2024, potentially hampering its ability to raise external capital. Further, AMC may benefit from another “meme stock” short squeeze rally due to its historical focus; however, I believe that is unlikely given its lower short interest level.
AMC faces a highly steep uphill battle regarding its deteriorated balance sheet. Before 2020, the company was already in a challenging position due to the extremely high debt it took on to acquire many of its rivals over the previous decade. That is a much more significant issue because interest rates are higher today. Its interest on that debt is around $400M annually as of last quarter, increasing its interest expense on its long-term debt. AMC has never sustained an operating income much over the ~$300M level, making it extremely difficult for the company to maintain a positive operational cash flow without a much more significant increase in sales.
The company was able to use equity sales as a means of maintaining liquidity around the 2021-2022 period, as its market capitalization was extremely high compared to its debt. Today, however, its market capitalization is very low relative to liabilities, mainly when we account for its capital lease obligations. See below:
AMC’s working capital at the end of Q2 was -$846M, meaning its current liabilities were much more significant than its existing assets (such as cash) at the end of Q2. At the end of Q3, AMC had $980M in current assets after raising its cash level to ~$730M through its summer equity sales. Its current liabilities were ~$1.53B, giving it a net working capital of ~$800M. Despite its efforts, the company did not manage to fix its working capital issue but did stop the problem from becoming worse. Thus, without an unlikely wave of operating cash flow, the company must either refinance its debt at a higher interest rate or sell equity to improve its position.
Last month, after its Q3 report, the company announced it would sell an additional $350M worth of stock. The stock has lost an extra 30% of its value since that announcement. With its market capitalization hardly being over $1B, I do not believe it can continue to use the equity dilution strategy efficiently to maintain its working capital. Fundamentally, if its negative working capital is as significant as its market capitalization (or nearly so), it likely cannot raise enough capital through equity sales to meet its other financial obligations.
Economic Tailwinds Become Headwinds
As COVID concerns drop from public consciousness, there has been a sharp increase in movie theater sales. Ticket sales and prices were solid in Q3 and generally were near its pre-COVID levels. Many people have returned to theaters, having not gone to theaters often before 2023. The company has also had its best food and beverage sales in recent years over the past two quarters. Still, though the year is not over, 2023 total movie ticket sales in North America will likely be well below pre-COVID normal levels.
From this quarter on, the company will face headwinds from the acting and writing strikes earlier this year. Though the strikes are now over, well over fifty significant movies will be delayed or suspended because of it impacting primarily 2024 movies and ones extending into 2025. Theaters have considered re-releasing old films or concert films to try to make up for the impending gap, and some movies will still premiere in early 2024, but undoubtedly, the strikes will have a significant negative impact on AMC’s 2024 performance.
Fundamentally, those strikes could not have occurred at a worse time for AMC. The company is in the middle of a battle to try to emerge from an immense working capital deficit. It is facing ever-higher interest rates on its overleveraged balance sheet. Just as the firm is finally posting positive operating income, it is now facing a catalyst that I believe will push its 2024 operating income back into negative territory. Potentially, this issue will make it very difficult for AMC to emerge from its liquidity shortages.
Of course, the economy has been generally strong over the past two years regarding consumer spending. In my opinion, based on a great deal of research and analysis, it is likely consumption spending will decline in 2024 as a result of declining consumer financial stability. AMC is already struggling to raise ticket prices sufficiently to account for higher theater operating costs, and I expect that issue to worsen next year. A consumer-driven recession is undoubtedly not a guaranteed risk in 2024, but if it does occur, I do not believe AMC is in a financial position to navigate it.
The Bottom Line
Overall, I remain bearish on AMC but would not bet against it at its current price. At this point, AMC has lost so much of its value that I do not believe it can sell sufficient equity to reduce its ongoing working capital deficits. If ticket sales continue to recover and its operating income rises above its interest costs, then there could be some fundamental value in the stock. Even then, its interest costs are so high compared to its operating income that potential profits seem small, even compared to its low market capitalization.
For example, in a best-case scenario, AMC may generate $400-$500M in operating income, which would equate to around $0 to $100M in pre-tax profits. That would not give it a solid “P/E” ratio even at its depressed valuation. In fact, the analyst consensus gives AMC an indefinite negative EPS outlook, primarily due to its high interest expense levels. Thus, given its working capital deficit and the potential for a decline in operating income next year (due to the strike and potential recession), I firmly believe AMC will face credit risk events unless its market capitalization rebounds due to another round of speculative fervor. Its short interest is 11.5%, which is high but low for the stock compared to its history, making short squeeze probability lower but still not necessarily low enough that I’d bed against it today.
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