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Jamie McCarthy/Getty Images Entertainment
When we last covered AMC Entertainment (AMC), we suggested that the one behavior that investors should “ape” should be that of the upper management.
We still think this is headed lower, although a pause will not surprise us in the least. Keep in mind that AMC has a 1-year return of 666%, so it would be normal for a lot of selling to come in after the tax year is done. As we saw recently, the CEO and CFO have been bailing on their shares and we believe that is a behavior you should ape.
Source: The Apes Of Wrath
The stock is now down 33.36% since then and the selling we were looking for, has come in.
Performance Since Last Article
Seeking Alpha
Where do we go from here? We look at three key factors that we considered.
1) 2022 Cash Flow
AMC’s earnings are stuck decisively in the negative with no relief in sight in 2022. The good news here is that revenue and earnings estimates are stabilizing.
AMC Revenue Trends
Seeking Alpha
One reason for the stabilization, despite the recent Omicron wave is that AMC is passing on some high price increases.
In the domestic market, revenue per patron was $20.15. Up $4.28 or 27% from Q3 of 2019. This was driven by 39% increase in food and beverage spend per patron from $5.35 in 2019 up to $7.41 in 2021, coupled with the 16% increase in average ticket price from $9.45 in 2019 up to $10.98 in 2021, and a 64% increase in other revenue per patron from $1.7 in 2019, up to $1.76 in 2021. In our international markets, revenues per patron was $16.95, up $3.60 or 27% from the third quarter of 2019. This was driven by a 41% increase in food and beverage spend per patron, from $3.59 in 2019 up to $5.07 in 2021, coupled with a 17% increase in average ticket price, from $8.45 in 2019 up to $9.91 in 2021, and a 50% increase in other revenue per patron from $1.31 in 2019 up to $1.96 in 2021.
Source: AMC Q3-2021 Transcript
Despite those huge increases and the big success of “No Way Home”, AMC’s troubles are unlikely to ease any time soon. On the third quarter conference call, AMC pointed to the $120 million annualized cash burn. That was just at the operating level and excluded a whole host of items.
And finally, operating cash burn, representing operating cash flow before interest payments, pay back of deferred rent, and non-recurring rent prepayments and off to capital expenditure was approximately $10 million per month, and this compares to approximately $42 million per month in Q2 and $107 million per month in Q1. And we continue to expect sequential improvement as we go into the fourth quarter. Indeed, as Adam noted, the fourth quarter got off to a very strong start.
Source: AMC Q3-2021 Transcript
Total cash burn in Q3-2021 was close to $200 million. AMC’s cash balances are still high, thanks to selling stocks to the apes in the middle of last year at insane prices. But its current liabilities (even excluding operating lease liabilities) are very high as well.
AMC Balance Sheet
Q3-2021 Financials
We expect cash burn in 2022 will be at least $500 million. Added to another $150 million to be reported from Q4-2021, we see AMC’s balance sheet getting much weaker over time.
2) Bankruptcy Risk
AMC’s interest rate on debt is on the high side with the company paying $80 million in interest expense just in Q3-2021. The good part though, is that it has no pressing maturities in 2022.
AMC Debt Load
Q3-2021 Financials
2023 is a different matter though and $560 million comes due then. Even taking the optimistic leap of faith that AMC can hit its pre-2020 EBITDA run rate of close to $900 million, debt to EBITDA will still be over 6.0x in 2023.
Data by YCharts
We are looking at pure debt and ignoring operating lease liabilities. The company also has about $400 million of deferred rent that is not counted in the above 6.0x ratio. In any kind of normal market, we would not expect a refinance to succeed.
3) Short Interest
The biggest risk to bears is a shorter term squeeze. Obviously on a fundamental level AMC’s fair value, even assuming exceptionally generous valuation metrics, is far lower than the stock price. But a squeeze is possible considering that the company has not sought additional share issuance to appease its fan base. Current short interest levels are high, but justified with low borrowing costs.
Data by YCharts
We would close out the short position if we saw a surge above 25% alongside rising borrowing costs.
Verdict
AMC will make it through 2022. The extent of the cash burn in 2022 will be critical to assess whether we can make the same statement for 2023. Credit markets are still remarkably sanguine but any tightness there and you can rest assured that refinancing the 2023-2026 debt loads will tip the company over. We remain bearish and look for the stock to visit its intrinsic value in the low single-digits. Our position size has been kept modest to withstand a potential squeeze.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
