AMC Leisure: It is Going To Get Worse Earlier than It (Hopefully) Will get Higher

As a toddler and teenager, one in every of my favourite issues to do was going to the films. Sitting in a darkish theater, watching the most recent smash hit movie, consuming popcorn, and consuming soda, was a good way to go the time. So it pains me the stance that I’ve to take on the subject of AMC Leisure Holdings (NYSE:AMC), an enormous world operator of film theaters. For a while now, I’ve been bearish on the enterprise. Its troubles actually started with the COVID-19 pandemic. And regardless that that’s now lengthy over, the agency continues to wrestle from low attendance charges pushed largely by the delayed influence of employee strikes in Hollywood final yr.

In my final article in regards to the firm, printed in Could of this yr, I ended up downgrading the inventory from a ‘promote’ to a ‘robust promote’. This got here after shares had skyrocketed 180.7% since my prior article on the agency in what many have thought-about to be the second meme inventory rally. My conclusion on the time was that this transfer greater tremendously overvalued the enterprise given the troubles that it’s dealing with. And thus far, that decision has confirmed to be right. Since my most up-to-date article, shares are down 17.9% whereas the S&P 500 is up 6.6%. And since I first rated the corporate a ’promote’ again in January of 2021, shares are down 93% whereas the S&P 500 is up 51%.

Fascinating developments

Essentially talking, AMC Leisure is struggling an awesome deal. For example, we’d like solely have a look at the newest information supplied by administration, which might cowl the second quarter of the 2024 fiscal yr. Income throughout that point was $1.03 billion. That is a drop of 23.5% in comparison with the $1.35 billion the corporate generated only one yr earlier. This was pushed by a plunge in attendance. Within the US, attendance at its theaters totaled 36.49 million within the second quarter. That was down precipitously from the 50.02 million reported the identical time final yr. Worldwide attendance, in the meantime, dropped from 16.35 million to 13.52 million. All instructed, world attendance for the corporate declined 24.6% yr over yr.

A part of this may be attributed to a decline within the variety of theaters and, by extension, screens that the corporate has in operation. Within the US, the variety of theaters dropped from 569 to 554. And internationally, the quantity dropped from 337 to 332. Collectively, this introduced the variety of theaters down globally from 906 to 886, with the variety of screens falling from 10,120 to 9,889. For a while now, administration has been closing down underperforming areas. This is smart when you think about the issues the business has gone via and the truth that the corporate has had points concerning income and money flows. I imply, between 2021 and 2023, the corporate noticed internet working money outflows of $1.66 billion. This image had improved from one yr to the subsequent, largely due to a restoration following the COVID-19 pandemic. Nevertheless it has not improved sufficient with a purpose to make the corporate wholesome once more.

One other drawback for the corporate this yr has been a discount within the variety of main movies launched by studios. As I detailed in my most up-to-date article in regards to the agency, the variety of movies deliberate for the 2024 field workplace was decrease than what was seen within the prior yr. Employee strikes had been accountable for this, with a forecast for the variety of movies coming from all manufacturing studios anticipated to say no from 150 final yr to 128 this yr. I do truly assume that there’s some glimmer of hope right here. I say this as a result of there have been a few main field workplace hits currently. Each of the movies that come to thoughts are courtesy of The Walt Disney Firm (DIS). Globally, Inside Out 2 has grossed $1.63 billion, making it the very best grossing animated movie in historical past. The overall home field workplace for it was $642.5 million. After which, there was the third installment of the Deadpool collection, Deadpool & Wolverine, which is presently at $1.14 billion globally, with $546.Eight million of that coming from the home field workplace. This makes it the very best grossing R-rated movie ever.

These successes will seemingly encourage manufacturing studios to begin investing extra in theatrical content material. And I’d think about that, by someday subsequent yr, this could permit a extra significant and sustained restoration for the business. That does not imply, after all, that there cannot be some profit this yr. In a press launch issued on July 29th, AMC Leisure acknowledged that over 6 million moviegoers watched a movie at one in every of its theaters within the US between July 26th and July 28th. This made it the corporate’s highest weekend of attendance and admissions income thus far this yr. Moreover, it was the very best weekend for meals and beverage income that the corporate had seen since 2019.

On the underside line, efficiency achieved by AMC Leisure has been fairly dismal. In the newest quarter, the corporate generated a internet lack of $32.Eight million. That is far worse than the $8.6 million achieve reported one yr earlier. Working money move worsened from destructive $13.Four million to destructive $34.6 million. If we regulate for adjustments in working capital, it worsened from $37.Three million to destructive $64.Three million. And at last, EBITDA for the corporate plummeted from $182.5 million to $29.Four million. Within the chart above, you may as well see monetary outcomes for the primary half of this yr relative to the identical time final yr. The second quarter weak point was half of a bigger development, not a worn off.

If AMC Leisure had little to no debt, I would not be as involved as I presently am. However the truth of the matter is that, as of the newest quarter, the corporate had $3.57 billion of internet debt on its books. Apparently, debt has remained in a reasonably slender vary between 2021 and the newest quarter of this yr. And actually, the present stage of debt is definitely decrease than what the corporate had within the first quarter of this yr and it is decrease than it had on the finish of any of the final three fiscal years. Administration has achieved nicely in that regard. Nonetheless, this has come at a price. And that value has been vital shareholder dilution. From the top of 2021 via the current day, inventory issuances made by the corporate resulted in shareholder dilution of 70.3%. This isn’t sustainable in the long term. And actually, with the corporate’s market capitalization at $1.80 billion as of this writing, there’s not far more that the corporate may elevate to deal with debt with out spooking markets.

Administration has been making different efforts to get the corporate via these tough instances. Earlier this yr, in late July to be exact, administration engaged in some refinancing transactions. They basically had been in a position to swap out $1.1 billion value of present time period loans that had been supposed to return due in 2026, in addition to $100 million of second lien subordinated secured notes due in 2026 for $1.2 billion value of latest time period loans that may now come due in 2029. The corporate additionally issued simply over $414 million of exchangeable notes for money, with which it repurchased an equal quantity of second lien notes. These notes are exchangeable for 82.6 million shares of the corporate, however the firm additionally has the power to difficulty as much as one other $100 million value for the aim of debt discount. Plus it has the power to difficulty as much as one other $800 million of latest time period loans with a purpose to repurchase present time period loans.

There are all types of various hypothetical eventualities that we may have a look at concerning these transactions and the influence they’ll have on the corporate’s backside line. The image is very sophisticated when you think about the power for the corporate to pay a few of its curiosity in-kind (within the type of new notes versus money) if it so wishes. But when we preserve issues easy and use solely the preliminary quantities that the corporate stated that they might faucet into and we assume that each one curiosity from present notes and new notes are paid in money, then in line with my estimate, and factoring in present rates of interest, the agency would possibly solely need to pay an additional $6.5 million in curiosity expense yearly, whereas concurrently getting the power to push off a few of its debt for a number of years.

As I discussed already, the preliminary exchangeable notes issuance may end up in the issuance of as much as 82.6 million shares. However that is solely what we’d need to take care of out of the gate. If the corporate faucets into the complete quantity that it could possibly and pays the entire curiosity in-kind, then we’re taking a look at as much as 128.Eight million shares that may be put out. On the low finish of this vary, we might be taking a look at one other 20.4% dilution. And on the excessive finish, we might be taking a look at one other 28.6%. That is higher than letting the corporate collapse. Nevertheless it’s actually not an enviable place to be in.

As for what shares would possibly truly be value, that is the magic query. We won’t actually worth an organization that’s constantly money move destructive. So one of the best ways to have a look at that is to see what sort of money flows could be wanted for the corporate to be pretty valued. Within the chart above, you possibly can see eventualities the place the corporate could be buying and selling at 10 instances or 20 instances on both a value to adjusted working money move foundation or on an EV to EBITDA foundation. Even in one of the best case, the agency would wish to have $90 million of adjusted working money move and $268.Four million value of EBITDA with a purpose to be pretty valued at multiples of 20. However to place this in perspective, again in 2019, earlier than the COVID-19 pandemic actually had an influence on the agency, it was buying and selling at a value to adjusted working money move a number of of 1.Four and at an EV to EBITDA a number of of 8.5. So I discover it impossible that it could commerce a lot greater, if any greater, than this.

Takeaway

Essentially talking, AMC Leisure is presently a large number. Administration has labored arduous to stop the ship from sinking. However this doesn’t suggest that issues are going nicely. The corporate will definitely proceed struggling this yr. The excellent news is that we’re beginning to see some true life once more within the theatrical area. If the enterprise can maintain on lengthy sufficient to get via that, it must be high quality. However there is a distinction between being high quality and being a beautiful funding alternative. With an amazing quantity of debt on its books, money move issues, declining income, and vital shareholder dilution in prior years, I’ve to say that the inventory appears to be like to be, nonetheless, a ‘robust promote’.