May 2021 – Horror Movie Stock
Fans of classic horror movies love and expect the typical cliches like victims attempting to escape in a car that won’t start or a group of clueless teenagers taking refuge in an ominous looking haunted house. As viewers, we can’t help but groaning aloud “No! Don’t go in there!” As we know the killer lurks behind the next door. It is both obvious and exciting as we know the characters’ terrible decisions on screen will result in disaster and entertainment. AMC Entertainment Holdings (NYSE: AMC) has become a horror movie stock, with an army of Reddit investors driving the price up to perplexing highs, while reality and normal valuations wait in the shadows with an axe to grind.
Don’t Go In There!
Pre-covid, AMC operated 1004 movie theaters, had 103.8 million shares outstanding, and owed $4.8 billion in debt. As of the first quarter of 2021, AMC operates 950 movie theaters, has 493 million shares outstanding, and owes $6 billion in debt. The increase in shares outstanding means every $1 in stock price in 2021 moves the market cap 5x as much as a $1 increase in 2019. Shockingly, as shown in the chart below, at its 5-year high of $35 per share in 2016, the market cap was only $3.5 billion compared to $6.9 billion at $14 in 2021. The chart doesn’t show it, but today at $14 AMC has the highest market cap and valuation in its public history.
Retail Investors’ Nightmare on Elm Street
As AMC stock continues to attract valuation-apathetic investors, management and large institutional investors are taking advantage. AMC management has issued hundreds of millions of shares and debt, which both helps AMC stay alive but at the cost of heavy dilution to share holders. The winners here are management, where if AMC had to declare chapter 11 bankruptcy, the managers might lose their stock options and be fired in the restructuring. How diluted are shareholders? If you owned 10% of the company in 2019 and did not contribute to any of the secondary offerings, your interest has been diluted to 2%. That’s not all. With all the new debt issuance, annual interest costs are about $600 million. In AMC’s best year of 2018, the company produced $848 million of EBITDA! If the company were to climb back to that record year, about 70% of that EBITDA would go to servicing the debt. Equity shareholders would have very little left for themselves.
Silver Lake converted $600 million of debt into equity and promptly sold the stock.
According to a Reuters article, institutional investors like Silver Lake and the Ontario Teachers Pension Plan have eagerly sold their holdings on AMC to retail investors. “Silver Lake converted $600 million of debt into equity and promptly sold the stock.” Silver Lake had initiated the convertible deal with AMC in 2018, and once COVID lockdowns started in 2020, it looked like Silver Lake would take a large loss on their debt. Sometimes it is better to be lucky than good, as the rush of retail investors gave Silver Lake the opportunity to get out of their bad loan with a profit! Clearly, institutions who have vast resources to conduct due diligence on AMC are fleeing the stock, leaving retail investors to hold the bag.
Even if AMC were to return to its record years of producing $800 million in EBITDA, the large dilution to equity holders along with the additional debt service required leave very little, if any, profits for the retail stock holder. While AMC might make a fun meme, there is nothing fun about losing money and AMC stock seems to be a highly negative setup skewed towards investor losses. Sometimes the best course of action with a stock is exactly that in a horror movie – avoid the haunted house and run away!