AMC Entertainment Holdings Inc. (AMC, Financial) recently released its preliminary Securities and Exchange Commission filing for the quarter ended March 31.
The well-known movie theater chain, which holds the largest market share in the U.S. and Europe and operates in a total of 15 countries, shuttered all of its locations in response to the Covid-19 pandemic. Even as states in the U.S. began easing lockdown restrictions, allowing cinemas to reopen, AMC did not throw open the doors right away, seeing no point in doing so if the cost of running the business would exceed any profits brought in.
The path to reopening
With income at a halt in April, the company recorded $718.3 million in cash on hand at the end of the month, inclusive of a new debt offering worth $500 million that was necessary in order to stave off bankruptcy.
In order to remain solvent, the company will have to regain the ability to generate revenue soon. A representative said the following in an April statement:
"As we plan our reopening, the health and safety of our guests and associates is our absolute highest priority. To be able to open, we also need a line of sight into a regular schedule of new theatrical blockbusters that get people truly excited about returning to their favorite movie theaters. Those blockbusters are scheduled to return this summer, beginning with Warner Bros.’ Tenet and Disney’s Mulan, with many more major titles scheduled immediately thereafter.”
When the new debt offering was made in April, the company estimated that it would be able to operate under partial closures until Thanksgiving. However, in its preliminary first-quarter SEC filing, AMC expressed concerns about its ability to generate sufficient revenue in a short enough time frame. As of the filing, the company expects a net loss of between $2.1 billion and $2.4 billion, with revenue predicted to fall 22% from the prior-year quarter’s $1.2 billion.
While theaters are still closed, the company is conserving cash by furloughing hourly workers, working with landlords to defer rent and cutting executive salaries. There will be a cash hurdle to overcome here if the company plans to reopen during the summer, as it will have to rehire enough employees to operate the theaters while hoping to attract more than enough customers to make up for operating costs. Reopening too soon could easily lose the company its last chance.
Industry-wide headwinds
In addition to the problems of timing with new releases and attracting customers, AMC also faces some industry-wide headwinds that may prove to be at least somewhat permanent.
For example, Comcast Corp.’s (CMCSA) NBCUniversal celebrated the success of its digital release of “Trolls World Tour” in April, after which CEO Jeff Shell suggested doing simultaneous digital and theater releases even after movie theaters opened their doors again. In response, AMC issued a statement that it would no longer showcase Universal films at its theaters, as these films would not be as profitable as theater-first titles. As the potential of films to make a splash via digital release continues to grow, it is possible that more studios may choose to stream new films online rather than give priority to theaters.
A shorter-term problem is that when theaters reopen, they will need to implement social distancing guidelines to prevent the spread of Covid-19, which will limit capacity. Additionally, consumers that have become more accustomed to getting their entertainment from online streaming services may continue to avoid theaters out of caution.
Financials and valuation
At the end of the fourth quarter of 2019, AMC was already struggling financially, having nearly doubled its debt to $10.3 billion compared to $5.4 billion at the end of 2018.
The new $500 million debt offering will count as cash until it is spent, leaving the company’s cash-debt ratio at 0.03 for now, which is lower than 94.46% of competitors. The current ratio of 0.35 and Altman Z-Score of 0.29 indicate that the company is very likely to go bankrupt if it is unable to come to a restructuring agreement with its creditors.
Despite the high risk of investing in the company, it is still trading at a higher valuation than major competitor Cinemark Holdings Inc. (CNK, Financial). The price of AMC shares is down only 22% year to date, while the price of Cinemark shares is down 52% for a price-earnings ratio of 10.02. While Cinemark’s current ratio of 0.9 and Altman Z-Score of 1.2 show that it will need to turn a profit soon in order to remain solvent, the company stated that it can turn a profit at only 10% occupancy, which it expects to achieve on its July 19 reopening date. Cinemark is the first major U.S. movie theater chain to announce a solid plan for reopening.
Looking forward
The price of AMC shares jumped 5% after its announcement of potential bankruptcy, likely due to investor hopes of turning a high profit if the company can pull off a save on strong summer sales.
The company expects to release its complete financial results for the quarter on June 9 after the market closes, providing more insight on the situation.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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