AMC Entertainment (AMC) is in a desperate situation. During the normal times, the company failed to make any meaningful profit and it was constantly generating a negative FCF. Considering that we are in the midst of a pandemic, it’s highly unlikely that AMC will be able to improve its situation in the current environment and create value. While the company plans to reopen its theaters on July 30, its business will not be able to return to normalcy anytime soon. As the United States continues to see a surge in active cases of COVID-19, there’s a high risk that the reopened theaters could be closed once again by the government officials to contain the virus. As a result, AMC will not be able to meet its obligations, since it has lost its revenue streams, and it will be forced to file for Chapter 11. While the recent note restructuring deal helped AMC to win some time, we still believe that bankruptcy is imminent since the company is expected to be unprofitable for the next couple of years. For that reason, we hold a short position in AMC.
Bankruptcy Is on Its Way
With more than 1000 theaters inside the United States, AMC is one of the biggest movie theater chains in North America. Despite its large size, the company wasn’t able to show a meaningful performance in the past, as its revenues were not growing and theaters were constantly losing money. Thanks to the low-interest-rate environment, AMC has been constantly borrowing cheap debt to aggressively expand all around the country, but it did not lead to any growth. The poor performance resulted in a depreciation of its share price and in the last five years, AMC’s stock declined by nearly 90%. At the same time, the theater chain accumulated too much leverage and at the beginning of June, it said that there’s a risk that it will not be able to meet its obligations and will be forced to declare bankruptcy.
The Q1 earnings results showed how bad things inside the company really are. In the first three months of the year, AMC’s revenues declined by 21.5% Y/Y to $941 million, while its non-GAAP EPS was -$2.22. The total net loss was $2.18 billion. At the same time, AMC has one of the worst operating and net margins in the industry and its stock trades at a negative EV/EBITDA ratio.
Source: Capital IQ
Right now AMC plans to reopen most of its theaters by the end of July. However, considering the surge in new active cases inside the United States, that timeline could be shifted once again, as authorities could start another round of lockdowns to contain the virus. California already did so and other States could follow. China also recently decided to close its movie theaters for the second time, as the country fears the beginning of the second wave of the spread of the virus, which could be even more devastating than the first one. Considering this, movie theaters along with companies from the travel industry will continue to be risky investments until the pandemic is over.
With $10.5 billion in debt at the end of Q1 and only $299 million in cash, AMC’s balance sheet is overleveraged and it’s unlikely that the company will be able to repay or restructure all of its outstanding debt. While recently it was announced that AMC has reached a deal with some bondholders to decrease its outstanding debt by $460 million to $630 million, its balance sheet is still overleveraged.
We would also not view the recent $300 million financing deal to be beneficial to the shareholders. It’s true that without the influx of liquidity AMC would’ve been bankrupt already, but the chances of it filing for Chapter 11 are still high. While the private equity firm Silver Lake, which has a board seat in AMC, has agreed to provide a $100 million senior loan to the company, it also was able to swap its holdings into first-lien debt as a part of the deal. This means that in the case of a bankruptcy, it’ll be the first in line to receive AMC’s assets.
At the same time, we don’t think that AMC will be able to profit from the release of the new blockbuster movies that are scheduled for late 2020 and early 2021. During normal times, AMC has been losing money and generating negative FCF. In Q2 alone it will have almost no revenue, as most of its theaters were closed during the period and it was operating in a zero-revenue environment. Considering that it’s nearly impossible to make any money at all in the current environment and the company still needs to pay interest to service its debt, we don’t see how AMC will be able t o recover from the current situation. The only way the company could continue to expand and create shareholder value in the future is by declaring bankruptcy, restructuring its debt, and wiping out all the current shareholder equity. As analysts forecast AMC’s EPS in 2020 and 2021 to be -$19.62 and -$3.11, respectively, we believe that in its current state the company will not be able to successfully service its debt. For that reason, we decided to short its stock, as we believe that AMC will have no other option but to file for Chapter 11 this year.
Disclosure: I am/we are short AMC. 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.