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Hot stock: AMC Entertainment Holdings still overvalued?

AMC Entertainment Holdings Stock (NYSE: AMC) is up nearly 3.5x from its April 2020 lows. AMC Entertainment Holdings – the largest movie theater chain – has the largest share of the US movie theater market, ahead of Regal and Cinemark Holdings. AMC stock has fallen from $2.10 to $8.50 from its recent low, compared to the S&P 500 which has recovered more than 75% of its recent lows. Over the past few weeks, the stock has seen intense short-term compression activity that has taken it close to $20. The stock has since fallen back to $8.50 in recent weeks. Despite healthy upside and volatility over the past few months, even at the current level, the stock is still down more than 40% from its December 2017 level. However, we believe the stock is currently extremely overvalued. and is expected to see a significant decline in the near term as the company faces a huge debt burden with bankruptcy only averted as of now. While it looks like the company will survive the pandemic for now, factors like streaming disruption, studios looking for ways to survive without theaters, and the possibility of the company falling into a new trap of debt while seeking growth and survival, will drive the stock down. Our Dashboard What factors led to a 43% change in AMC Entertainment Holdings stock from 2017 to now? has the key figures behind our thinking.

The decline in stock prices between 2017 and 2019 was driven by the sharp drop in the P/S multiple. AMC’s revenue increased 7.7% from $5.1 billion in 2017 to $5.5 billion in 2019. The decline in the number of shares also means revenue per share increased by 33%, going from $39.62 to $52.84 during this period. Despite healthy revenue growth, the P/S multiple fell 65% from 0.46x in 2017 to 0.16x in 2019. This was mainly due to earnings volatility as the company reported losses in 2019, and growing indebtedness putting a strain on margins and the balance sheet. The multiple crashed in 2020 following the outbreak of the pandemic and has recovered in recent months, as it now stands at its 2019 level of 0.16x. We believe that the uncertainty surrounding the sector and AMC’s fundamentals will likely keep the P/S multiple low in the near term.

Where is the stock going?

The global spread of the coronavirus has led to lockdowns in various cities around the world, leading to cinemas closing for months together. The shutdown along with lower consumer spending had a significant impact on the movie industry, which was reflected in these companies’ second and third quarter 2020 results. AMC’s revenues experienced a near complete collapse in the second and third quarters of 2020, with revenues down 99% and 91% year-over-year in those two quarters, respectively.

However, there have been signs that global lockdowns have been lifted in recent months. As the global economy opens and lockdowns are lifted in phases, consumer demand is slowly picking up. Any further recovery and its timing depend on the broader containment of the spread of the coronavirus. Our Dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia. With lockdowns lifted, AMC opened a few of its theaters in January 2021 and a few more in February. However, it will operate at a very low occupancy limit (example: 25% occupancy limit in Illinois).

With investor focus having shifted to 2021 and beyond, ideally the stock should do well given the gradual reopening of cinemas. But that’s not the case with AMC. Management had warned in October 2020 that the company could declare bankruptcy in early 2021. In December 2020, its own lenders offered bankruptcy as an option, as the company faces the pandemic with nearly $6 billion in debts. Moreover, to raise more cash, the company is also counting on issuing more shares. Since Q3 2020 (when it had 107 million shares outstanding), AMC’s stock count increased to 137 million in October 2020, and in December alone it asked to sell more shares . However, fears of bankruptcy have been dismissed for the time being following the injection of $917 million in cash into the company ($506 million from the December 2020 stock issue and $411 million from the debt raised with its European subsidiary Odeon). An additional 164.7 million shares recently issued to avoid bankruptcy are expected to dilute profits for its existing shareholders. Additionally, the last previous debt the company took on in January 2021 was at an interest rate of 15%, signifying the pressure its earnings will face in the coming quarters. With most of the top studios having their own streaming business, the dynamics of the industry are changing, with studios needing to be less dependent on theaters for their growth in the future. Thus, the streaming boom also negatively affects AMC’s business. In summary, although theaters are opening, factors such as high debt burdens, rising interest costs, shareholder dilution and streaming disruptions will likely drive the stock price down significantly. from AMC, even from its current low near $8.50.

Although AMC stock has moved a lot, 2020 has created many price discontinuities that can provide interesting trading opportunities. For example, you will be surprised how the valuation of stocks for Netflix vs. Synopsys shows a disconnect with their relative operational growth. You can find many discontinuous pairs here.

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