AMC: The Obsession Needs To Stop As It Is Burning Through Its Cash

New York during the COVID-19 emergency.

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Top Gun Maverick was released on May 27th, and as of August 14th, it had surpassed $1.37 billion in global box office revenue. AMC Entertainment Holdings (NYSE:AMC) Q2 2022 earnings included Memorial Day Weekend and all of Junes revenue from Top Gun Maverick being shown at their locations, and once again, they couldn’t turn a profit. The obsession with AMC stock needs to end. Blockbuster movies such as Maverick come along once, and a blue moon as Maverick just surpassed Titanic as the 7th highest grossing film of all time. I am not saying AMC is headed for chapter 11, but this is an unprofitable company that can’t even turn a profit when one of the biggest movies in history is showing in their theaters. I think AMC is incredibly overvalued, they will need to do a capital raise over the next year, and the chances of them getting to the point of sustained profitability looks bleak. All the investors with the mentality of diamond hands should take a step back and look through AMC’s financials. The short interest is sitting around 18.45% (per Seeking Alpha), so a short squeeze is possible, but as a long-term investment, AMC doesn’t look good as further dilution is almost inevitable.

AMC doesn’t make money, and I will take a numbers-driven approach on an annual and quarterly basis

I am agnostic toward AMC, I don’t have feelings toward the company, I am not an investor, and I will never be an investor. I am going to start with a quarterly review of AMC’s financials.

Here are the numbers from Q2 2022:

  • Revenue $1,166,400,000
  • Gross Profit $170,600,000
  • Operating Income (-$16,200,000)
  • Earnings from Continuing Operations (-121,600,000)
  • Net Income (-$121,600,000)
  • Cash From Operations (-$76,600,000)
  • Free Cash Flow (-$134,800,000)

Keep in mind that Q2 had Memorial Day Weekend and Top Gun 2 Maverick. AMC generated $1.17 billion in revenue, and its cost of revenue was 85.37% of what it took in. To generate the $1.17 billion of revenue, it cost AMC $995.8 million. This doesn’t include operating expenses, interest, or taxes. AMC had $170.6 million in Gross Profit left over, which is a slim gross profit margin of 14.63%. AMC’s total operating expenses came in at $186.8 million, placing its operating income at -$16.2 million. After interest expenses, taxes, and other items, AMC generated a negative net income of -$121 million.

When I look at the Statement of Cash flows, I get even more concerned. Since Q4 2019, which is the previous 11 quarters, AMC has only generated positive cash from operations 2 times. Over the past 11 quarters, AMC has generated -$1.75 billion in cash from operations, putting their FCF at -$2.23 billion. The pandemic was absolutely a factor, but when you look at the previous 3 quarters, the story isn’t pretty. In Q4 2021, AMC generated $5.6 million of FCF as it posted $46.5 million of cash from operations and its Cap-Ex amounted to -$40.9 million. When you add in the first 2 quarters of 2022, over the previous 3 quarters, which includes the holiday season and Top Gun 2, AMC generated -$325.1 million in cash from operations, and their FCF was -$459 million.

AMC Income Statement

Seeking Alpha

When you look at AMC on an annual basis and use the trailing twelve months (TTM) for 2022, the picture isn’t prettier. 2018 and 2019 were AMC’s strongest years from a revenue perspective, as it generated $5.06 billion in 2018 and $5.02 billion in 2019. AMC lost money between these 2 years. In 2018, AMC made $110.1 million in net income; in 2019, AMC lost -$149.1 million in net income. This is a business that, over the past 11 years, has generated a profit over 6 years and lost money over 5 years. In the 6 years that AMC generated a profit, its cumulative profit was $808.9 million for an average of $134.82 million per year. The last year that AMC generated a profit ($110.1 million) was in 2018, and its cumulative revenue for the years it generated a profit was $18.68 billion. AMC’s profit margin in these years was 4.33%. When you factor in the 5 years of negative profits, over the last 11 years, AMC has lost -$6.5 billion from $35.29 billion in revenue. While AMC may never go under, these numbers are upside down, and the current valuation of $9.31 billion doesn’t make sense as AMC is unprofitable, and its balance sheet is sub-optimal.

AMC’s Balance Sheet has several red flags and indicates a distressed company

AMC’s CEO used to talk about the war chest of cash that AMC had on its balance sheet, and in previous AMC articles, I indicated that its cash position would diminish as it would be utilized to fund operations. Over the previous year, AMC’s cash position has declined by -$846 million or -46.71%. This isn’t the only problem on its balance sheet. At this rate, AMC will burn through its remaining cash over the next 5-6 quarters if the business metrics don’t improve, or if AMC doesn’t commit to a capital raise.

AMC Cash and short-term investments

Steven Fiorillo, Seeking Alpha

Since Q4 2019, AMC’s total assets have also declined. AMC had $13.68 billion of total assets on the books, and this number has declined by -28.21% or -$3.86 billion. The declining assets have impacted AMC’s total equity as its declined by -$3.54 billion since Q4 2019. AMC now has -$2.33 billion in equity on the books, and this correlates to negative book value. Since Q4 2019, AMC’s book value has declined from $11.69 to -$4.50. When you strip out the intangible assets and look at the tangible book value, AMC has never been in the black on this metric over the previous 11 years. AMC’s tangible book value per share is -$9.49 per share.

AMC Balance Sheet

Seeking Alpha

AMC has $10.46 billion in total debt, negative book value, negative equity, declining cash reserves, and depleting assets. AMC doesn’t generate a profit, and the only way I see them staying afloat is by issuing shares and raising capital. AMC’s business model hasn’t proven it can generate sustainable profits, and its costly business expenses make it difficult to at least break even.

Why I think AMC will have no choice to dilute shareholders and why it will work

AMC is an enigma, and the investment premise doesn’t make sense. Shareholders do not look at AMC as a rational investment and cling to the praise of diamond hands as if it’s a religion. Adam Aron, on the Q2 call, announced AMC’s plan to issue a special AMC preferred equity, non-dilutive stock dividend. AMC will issue a 1 for 1 stock dividend of a new AMC preferred equity unit to common shareholders. Adam Aron obviously has a sense of humor because the new preferred equity units will trade under the ticker symbol (APE), which he says stands for AMC preferred equity. The acumen couldn’t have worked out better for him. The number of issued and outstanding AMC commercials shares will remain unchanged at 516,820,595 after the dividend is paid.

Adam Aron in the past, has indicated that AMC wouldn’t issue more shares of AMC stock unless shareholders felt it was necessary. Deep in the earnings call, he stated:

“Given the flexibility that being able to issue more APEs will give us, we believe that we would handily be able to raise money if we so choose, which immensely lessens any survival risk as we continue to work our way through this pandemic to recovery and transformation.

While issuing APEs as a preferred equity share on a 1-to-1 basis isn’t dilution initially, Mr. Aron was clear that AMC will have the ability to issue more APEs. Mr. Aron described APEs as a currency that can be used in the future to further strengthen the balance sheet. Since Mr. Aron declared no further common share dilution, I believe this is a way for AMC to raise capital without breaking that promise. His commentary certainly supports that notion.

I don’t believe AMC has a choice, and the newly minted APE shares will end up being diluted. I also believe the investment community will bye them up, and it will keep AMC afloat. The only move AMC has is to raise money in the capital markets as its inability to generate FCF or profits is taking a toll on the actual business.

Conclusion

AMC’s cash position is depleting, and one of the largest grossing movies of all time couldn’t get AMC into positive territory in Q2. AMC’s balance sheet continues to find itself at sub-optimal levels, and its equity and book value are in the negative. I think AMC is very overvalued, but that doesn’t mean going the way of Blockbuster is in their future. AMC just announced APE shares as a preferred equity vehicle and indicated this would allow AMC to raise money in the future. I think AMC will issue more APE shares in the future, and it could help deleverage its balance sheet and build back its cash position. The longer-term problem is getting AMC to sustain profitability, and I don’t see a path to accomplish that goal anytime soon.

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