AMC stock is up nearly 1,700% this year – where will it go next?
AMC Entertainment‘s (NYSE: AMC) So far, the performance in 2021 has been nothing short of remarkable, although there is little about the underlying activity to justify such a dramatic increase. In this fool live Video clip, recorded on October 4, Fool.com contributors Matt Frankel, Rachel Warren and Jason Hall explain why AMC has rallied, the positive developments with the company itself (there are a few) and where the stock could go from from here.
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Matt Frankel: But real quick, and let me give you a taste of AMC because it’s not an entirely terrible story, to be fair. In fact, I would give their management a pretty high mark for the way they handled last year.
Jason Hall: 100%.
Frankel: AMC, we all know what they’re doing. I’m not going to waste time telling everyone what AMC is doing, it’s the theater operator. They were not well placed when the pandemic started. Obviously, the cinemas closed at the start of the pandemic, they remained closed for a long time. Theaters are just starting to increase their theatrical release schedules. AMC was drowning in debt, to say the least, at the start of the pandemic, and their shares were, I believe, $ 2 a share at one point. AMC is up 1,670% this year. I guess they are the top performers of all the companies we’re talking about.
Room: That’s an excellent return over 20 years in nine, 10 months.
Frankel: Why have they been so successful? It would be easy if you could just say they’re a memes store and move on. But AMC has caught the attention of a group of retail investors. Because of this, the price of their shares goes up. At first, you might attribute it to a short press. AMC really took advantage of the situation and started raising capital at the new higher stock price by selling more stocks. They have raised a total of about $ 2 billion since the start of the pandemic, about $ 1.25 billion in the second quarter alone. They currently have about $ 2 billion in cash on their balance sheets.
They are starting to use some of that money to pay down their debt, which is their biggest problem. They just announced that they are buying back $ 35 million of their debt at the highest interest rate. By the way, all of that debt has an interest rate of over 15%, just to let you know how much interest is hanging around this company. They have started to buy this back, they want to improve their theaters, to acquire more troubled theaters from competitors in the current environment.
I give their CEO a big pat on the back, but they really, I don’t mean justify their assessment. I’m not sure it could even happen. To put it in perspective, AMC’s market cap currently exceeds $ 19 billion. The highest they had ever reached before the pandemic in the glory days of cinema was $ 4 billion. They are trading at more than five times their highest valuation before the pandemic. This valuation is really their big competitive advantage if the shareholders allow it.
If they could just sell $ 5 billion in stocks and put their debt off right away, I would probably have a different conversation. They could have been my sixth stock instead of my seventh. But shareholders have blocked the CEO’s ability to sell more stock at this point, which seems ridiculous to me. I think valuation is the biggest competitive advantage they have going forward. Not that I really need to put words in your mouth or anything, but why did you like this number 7? [out of seven stocks that have doubled or more this year]?
Room: I will go very quickly here. Forgive me, Rachel, for intervening because I have to share this painting.
Rachel Warren: No it’s OK.
Room: It’s not just the market cap, it’s the value of the business. If someone wants to buy the business, you are also going to take on the debt. You’re not just going to buy the business, you have to take on that debt. Again, this is five years. It’s been 10 years. It is an incredible assessment. The most important thing for me is to paraphrase something Peter Lynch said: “You can own the best business in a poor industry and you still own a poor business.” This to me fully sums up AMC. It’s a mediocre industry right now.
Warren: Yes I agree. I have to say I think even before the pandemic you were seeing these major changes in people who went to theaters less. Now, with so many great streaming services available, and these businesses are growing by leaps and bounds, people love the idea of being able to sit at home in their pajamas and light up their favorite movie, or catch something little. long after its release on their favorite platform, and they don’t need to go to the theater.
Then, with the pandemic, this of course only accentuated this trend. I think it comes back to what you said, Jason. I think the business model itself is not what it used to be. Then I think couples with AMC’s current situation and the fact that there doesn’t seem to be anything doing to raise more capital to reduce this debt. I just think it’s a lose-lose situation.
Jason Hall has no position in the stocks mentioned. Matthew Frankel, CFP has no position in the stocks mentioned. Rachel Warren has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.