Buoyed by millions of meme traders, AMC has transformed from a company on the brink of pandemic-induced bankruptcy to amassing the highest cash flow in its history amidst a meteoric stock surge. But is the world’s largest theater chain now in a better position for the COVID-19 recovery period than its competitors?
While analysts who spoke to TheWrap commended AMC’s CEO Adam Aron for navigating through the pandemic and using an unexpected internet craze to his company’s advantage, they note that challenges lie ahead, some that are tied to AMC’s still substantial debt load and others facing the movie theater industry as a whole.
“They have over $1 billion of cash and still have quite a bit of debt, but they are doing the right thing, selling equity at elevated levels and using the proceeds either to grow or to pay down debt,” said Wedbush financial analyst Michael Pachter. “I think the CEO deserves congratulations for being willing to sell stock up here, since he is charged with keeping the company in good shape. He has navigated the COVID seas and avoided the icebergs, and deserves accolades for doing so.”
Just a day after AMC announced a new equity deal in late January that would provide enough liquidity to get through 2021, the Reddit page r/wallstreetbets phenomenon kicked off, sending the company along with others like GameStop on a wild stock ride. The efforts of the meme traders, or “Apes” as they call themselves, combined with strong Memorial Day box office numbers, sent AMC’s stock soaring as high as $67.29/share.
That’s nearly double the previous 5-year high for the stock of $35.80 back in 2016; and while financial analysts have warned that such a high price cannot be sustained for long, AMC closed Thursday at $51.31. Meanwhile, Aron announced on Tuesday that his company had made a stock sale for $230.5 million and would use the new cash flow to acquire new theaters, particularly shuttered locations once owned by Pacific Theaters and ArcLight Cinemas.
While it is a risk for a company with nearly $5 billion in debt to use its new windfall on more acquisitions, very little of AMC’s debt is immediate. According to the company’s financial reports, only about 10% of its debt — $418 million — is due within the next three years. Exhibitor Relations analyst Jeff Bock says that the acquisition plans send a sign to studios that there is renewed confidence in the strength of the box office.
“This is the sort of sign you want to see from the biggest cinema chain in the world,” Bock said. “While we don’t know whether AMC will customize offerings to provide the sort of experience ArcLight customers were accustomed to, the investments they put into recliners, premium food and bars and other luxury offerings would make them a natural fit to acquire some of those closed theaters.”
But Pachter points out that fellow multinational chain Cinemark may be in a stronger position than AMC, even if it hasn’t been dominating industry headlines. Cinemark’s stock has not returned to pre-pandemic levels but has been gradually trending upwards from its year-start price of $16.16/share, closing on Thursday at $23.07. More importantly, Cinemark has considerably less long-term debt at around $2.5 billion, giving it more financial stability.
Pachter says that as the recovery process goes on and the effects of the pandemic continue to play out, he predicts that more chains and locations will fall in the same way that Pacific/ArcLight did. This will likely lead to an acquisition battle among AMC, Cinemark, and Cineworld-owned Regal to expand their circuits.
“I expect that there will be some more consolidation or bankruptcies, and expect only 30,000 – 35,000 screens in the US to reopen as things return to normal, down from 40,000, so the remaining chains all should benefit,” Pachter said.
But Bock says that if and when the box office returns to normal, the pandemic wanes and the Apes-generated cash flow windfalls run out, the long-term challenges still faced by the industry will remain. As AMC continues to balance its books while building more theaters, Bock says that it and the industry still need to focus on building the next generation of frequent moviegoers as more of Gen Z comes of age over the coming decade.
“I don’t think that movie theaters will ever go extinct, but right now the people driving the box office recovery are older generations: Boomers, Gen X, and yes, even Millennials,” he said. “As the father of a teen, I can tell you that a lot of Gen Z isn’t as attached to movie theaters and enjoy having more control over their media on phones and other platforms. Yes, they still go to theaters sometimes for the biggest films but they are much more selective, and once the existential threat of the pandemic is taken care of, theaters still need to figure out how they are going to deal with that problem.