Shareholders’ lawsuit against AMC Entertainment Holdings, Inc. (AMC) has weighed on its shares. Considering its heavy debt burden amid the recent financial crisis, the stock might be best avoided.
The recent bank collapses amid high inflation brought back fears of a full-blown financial crisis. As a result, companies with weak liquidity positions will most likely suffer in the upcoming months.
Amid financial difficulties due to the pandemic and costly theater upgrades, AMC created APE preferred shares to raise cash in August 2022, as they didn't have the authorization to issue more common shares. However, this move has led to a lawsuit by shareholders who accuse the company of violating laws by creating APE shares to reduce common stockholders’ voting power.
Following the investors' approval of the conversion of the company's preferred stock into common shares and a one-for-ten reverse share split, shares of AMC fell by approximately 17%. Moreover, the stock has declined 20.2% over the past month.
Additionally, macroeconomic headwinds have weighed heavily on the entertainment industry. Chad Beynon, a senior gaming, lodging, and theaters analyst at Macquarie Group, recently discussed the struggles of the box office to reach pre-pandemic levels and the outlook for the film industry with Yahoo Finance. Beynon trimmed his forecast for 2023 box office revenues by 10% to $8.4 billion.
Moreover, the biggest operator of cinema chains globally experienced a 17% decline in footfall in its theaters during the fourth quarter, even though major films such as "Avatar: The Way of Water" were released. The company's revenue also dropped by 15.4% year-over-year in the same period.
Furthermore, its revenue and EBITDA have declined at CAGRs of 10.6% and 76% over the past three years. As of December 31, 2022, AMC’s total debt was approximately $4.95 billion, while it had available liquidity of $842.70 million.
AMC has lost 55.2% over the past year to close the last trading session at $4.18. It has lost 45.7% over the past nine months and 21.3% over the past three months.
Here is what could shape AMC’s performance in the near term:
Bottom Line in the Red
During the fourth quarter that ended December 31, 2022, AMC’s revenues decreased 15.4% year-over-year to $990.90 million. The company’s adjusted EBITDA was $14.50 million compared to $159.20 million for the fourth quarter of 2021. The company’s adjusted net loss and adjusted net loss per share widened by 167.3% and 133.3% year-over-year to $152.90 million and $0.14, respectively.
Poor Profitability
AMC’s trailing-12-month gross profit margin of 7.43% is 85% lower than the industry average of 49.6%. Its trailing-12-month EBITDA margin of 0.24% is 98.7% lower than the 18.02% industry average.
Additionally, the stock’s 0.39x trailing-12-month asset turnover ratio is 16.1% lower than the industry average of 0.47x. Its trailing-12-month ROTC of negative 2.95% compares to the industry average of 3.54%, and its trailing-12-month ROTA of negative 10.66% compares to the 1.32% industry average.
Mixed Valuation
AMC’s forward P/S multiple of 0.49x is 58% lower than the industry average of 1.17x.
However, its forward EV/Sales of 2.62x is 41% higher than the industry average of 1.86x, while its forward EV/EBITDA of 40.1x is 387.2% higher than the industry average of 8.23x.
POWR Ratings Reflect Bleak Prospects
AMC has an overall rating of D, equating to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AMC has an F grade for Stability, consistent with its 24-month beta of 2.20. It has a D grade for Quality, in sync with its poor profitability.
AMC is ranked last among five stocks in the F-rated Entertainment – Movies/Studios industry.
Click here for the additional POWR Ratings for AMC (Growth, Value, Momentum, and Sentiment).
Bottom Line
Despite raising cash through APE shares, the company still faces financial challenges and continues losing money. AMC may need a significant amount of time to turn profitable.
Moreover, the reduced box office outlook, shareholders’ lawsuits, and the company’s piling debt indicate troubles for the company ahead. Hence, the stock might be best avoided now.
Stocks to consider instead of AMC Entertainment (AMC)
Unfortunately, the odds of AMC Entertainment outperforming in the weeks and months ahead are significantly compromised. However, there are many entertainment stocks with impressive POWR Ratings. So, consider these three B-rated (Buy) stocks instead:
Cedar Fair, L.P. (FUN)
Emerald Holding, Inc. (EEX)
Endeavor Group Holdings, Inc. (EDR).
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AMC shares were trading at $4.30 per share on Monday afternoon, up $0.12 (+2.87%). Year-to-date, AMC has gained 5.65%, versus a 2.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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