This article originally appeared on Simply Wall St News
I stayed out of the assessment AMC Entertainment Holdings, Inc. (NYSE: AMC) because the fundamentals just aren’t there. You will find a massive amount of articles that address the shortcomings of the business, and frankly, it’s pretty easy to do.
But we’re not going to do it today. In this highly speculative article, we’ll take the hardest route and watch how AMC could have a chance to revitalize itself and become profitable!
First, we must turn to reality!
AMC is in a very difficult position in several respects. The company has high debt, low income – not to mention profits, perhaps an indifferent board and management that have mostly (if not only) sold in the past 12 months.
Let’s start with finances.
Over the past year, AMC has recorded a loss before interest and taxes and actually reduced its revenue by 77%, to $ 875 million.
The graph shows quite clearly that the company is not in a good financial position. Income has barely resurfaced, and analysts are estimating a recovery on the assumption that the pandemic will pass – soon. That might not happen and people might not be hitting theaters as fast as investors would like. This is the income situation, let’s accept it and move on.
Then we look at the balance sheet.
Check out our latest review for AMC Entertainment Holdings
What is the debt of AMC Entertainment Holdings?
As you can see below, AMC had US $ 5.50B in debt, as of June 2021, which is roughly the same as the year before.
However, he also had $ 1.81 billion in cash, so his net debt is 3.69 billion US dollars.
AMC still has a long way to go before reducing its debt levels, and will likely seek restructuring options and tax breaks if it loses – every little bit counts.
The latest balance sheet data shows that AMC Entertainment Holdings had $ 1.56 billion in liabilities due within one year, and $ 11.2 billion in liabilities due thereafter. That’s quite a gap to close, but it’s actually manageable, especially if the company sees a rise in the share price and is raising funds by issuing more shares.
Insider trading is the last point we will look at before discussing the possibilities for the future.
Unfortunately, it seems that the insiders have ‘paper hands’, and many board members have sold a substantial portion of their positions (not the CEO). Here’s a look at what has happened over the past 12 months:
If you want a detailed view, go to our analysis HERE.
The management is also not in the best position, or does not have much “skin in the game”. The CEO, Mr. Adam Aron owns 0.15% of the company’s capital and is both CEO and Chairman of AMC. This generally paints a very negative image for management, however, given that the situation with AMC is anything but usual, we’re going to move on and not delve into his story as a professional CEO and increase his total compensation.
Looking at the overall picture, it’s clear that AMC is fighting an uphill battle, and investors need a lot to improve in order to come out on the winning side.
Now let’s look to the future and take a look at what AMC can do to make a difference.
Options for the future
First, we must define an end of game. A goal that we want to see achieved. There are a lot of things to choose from: the company being acquired, the growth in the stock price over the long term, a short squeeze that pushes the price up so traders can make a profit, etc.
For this analysis, I will choose the goal to be a rationale for the $ 21 billion market capitalization that AMC currently has. Basically I don’t want to see the price drop from here and hope the retail holders don’t lose their investment.
It might sound trivial and a low bar, but the $ 21 billion market cap is very high, especially for a small company like AMC.
Second, we need to look at the long term problems the company. I have compiled the following list:
Streaming services are taking over the industry
The company is not digitized insofar as it can be closer to customers
Poor corporate governance
The business is in a mature mindset and may struggle to revitalize
Note that financial performance, pandemic and debt levels are not mentioned. This is because they can be categorized (if we want to be charitable) as short (longer) term issues.
Now let’s move on to possible solutions to improve AMC as a business.
The first the option is acquisition, so let’s put that aside. This involves the arrival of a major streaming competitor and the introduction of a hybrid business model between streaming and cinema. They would benefit from using the AMC brand, a positive PR move, and giving their audiences the ability to purchase movie tickets for their favorite shows from their platform. Assuming the acquirer does machine learning correctly, they may be able to use their stats to show movies that will generate more revenue.
Acquisitions are very risky and difficult to make. But it could give shareholders the opportunity to profit from their investment. In a sense, they are buying the favor of the many people who still own stocks, which may be worth something in and of themselves.
Imagine what would happen to the share price if someone announced their intention to buy the company.
The second the option I’m going to suggest is a bit of the opposite of what management has been promoting lately. Instead of expanding, AMC should seek to reduce its value.
AMC has a lot of theaters in the United States and around the world. The company has some 14,000 employees. It goes without saying that all these points of sale do not have the same profitability. Chances are, management is very much aware of which theaters are the most profitable and can consider maximizing value by removing the more expensive ones.
This will make the business more manageable, less risky and more profitable. It will also reduce expenses and make the cinema a more exclusive activity.
The third option concerns the economic model. Obviously the company needs to digitize better – even their main website has some basic bugs that are annoying (some automated guides that can’t be turned off). But the main question is: is there another way to use the capacity of the theater, which is perhaps cheaper and will attract more visitors?
Although it differs between cultures, the cinema has been a way to spend free time with friends, family and loved ones. If AMC has a specific type of customer who is more inclined to visit their theaters, they may consider additional activities specifically tailored to that type of guest. Maybe he can do some A / B testing for the environment and figure out what works locally. It may also offer additional products, such as selling board games or quick shots for guests by a professional photographer as part of their AMC experience.
Alternatively, it may try to offer alternative media on the big screen, such as e-sports, game racing, or popular demand movie auctions. The latter just means people have a wish list of local films and are notified of a screening once enough people express interest.
Finally, whatever the game plan, shareholders need to know about it. It is up to management to chart a clear path to corporate profitability – it doesn’t have to happen tomorrow, but investors need to know what to expect in the long term.
It can be argued that revitalizing the AMC is comparable to a Herculean effort.
As analysts we can always point out the bad things in a business, but the hardest part in the market is finding value where others don’t. With that comes a caveat though, because it’s not enough to think differently, we also have to be right when others are wrong, and it’s pretty hard to be right against the market.
There are at least three options (or a combination of them) available to AMC in order to revitalize the business and maintain the current market capitalization of $ 21 billion:
Get a tech or streaming company to acquire the business and improve with their help
Reduce activity and operate cinemas that have been or are the most profitable
Improve business by scanning, adapting to local customer specifications, and trying other scouting activities like esports, gaming, etc.
We hope you have a clearer idea of the challenges AMC faces and the possibilities for improving the business in the long run.
AMC is always a risky stock, but people have the right to invest in the things they love and believe in.
Simply Wall St analyst Goran Damchevski and Simply Wall St do not have a position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
Do you have any feedback on this item? Are you worried about the content? Contact us directly. You can also send an email to [email protected]