To The Moon

Summary

• AMC Entertainment's stock has crashed this week, potentially putting the company in a tougher financial position moving forward.

• Despite an increase in moviegoers, AMC is still burning through cash and its balance sheet continues to weaken.

• The proposed 25 million share sale may not make a significant dent in the company's debt, leading to potential further dilution and lower share prices.

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Back in July, I detailed how investors in AMC $AMC Entertainment(AMC)$ Entertainment (NYSE:AMC) should sell while they still had the chance. The theater chain was preparing to combine its common shares with its AMC Preferred (APE) units, while also enacting a reverse stock split. After that, equity sales would resume as the company looked to improve its financial position. That time is now upon us, yet the stock's crash this week already puts the name in a tougher spot than it was just a few days ago.

As we have moved further away from Covid, people are starting to go back to the theaters in decent numbers, and a few hits like the Avatar sequel and latest Mission Impossible film led the domestic box office to its best first half since the start of the pandemic. The problem here is that AMC is still burning through cash, and its balance sheet has continued to weaken as seen below. Dollar values are in millions.

Balance Sheet Metrics

AMC Key Balance Sheet Metrics (Company Filings)

AMC management has found some opportunities to pay back some of its debt in recent quarters, and they've done so at large discounts. However, that has resulted in the company's cash balance dropping to just $435 million at the end of Q2, its lowest point since the end of 2020. Working capital is still deep in the red, with net debt finishing the second quarter at nearly $4.4 billion. AMC is not generating any positive free cash flow at the moment, which has limited chances to further improve the balance sheet.

The company had hoped to get this combination with APE and reverse split done earlier, but some legal challenges held that process up. This week, things are finally going to start moving forward, with the key timeline seen in the graphic below. For those that want to see additional details related to the process, they can be seen in this SEC filing.

Reverse Split

AMC Reverse Split Details (Company 8-K Filing)

AMC management has said that once this process is done, it will initiate an at-the-market program to sell up to 25 million shares of common stock. That's significant dilution when you consider that after the above events take place, there are expected to be about 158 million shares outstanding. This still leaves almost 400 million shares of the post-split trading AMC to be issued in the future, including the 25 million.

Here's where this week's crash in AMC comes in. At the end of last week, shares were over $4, meaning they would reverse split to more than $40. At that level, should it have held, the company could have potentially raised over $1 billion by selling the 25 million shares. With the stock now around $2.50, only about $625 million can be raised, and that assumes there is no further drop in the stock once the reverse split goes through.

Not counting any future debt discounts, raising over $1 billion could have wiped out almost a quarter of the company's net debt. That's important here, because in 2026 AMC has over $3 billion of debt coming due, which it obviously cannot pay back at this point. However, if the stock drops further moving forward, the equity sales plan may only allow the company to pay back about 10% of its net debt, leaving a nearly $4 billion hole.

In the table below, I've detailed the potential amount of dilution given further equity sales moving forward (starting at the 25 million that's coming), for example a total of 100 million shares would result in the share count rising by more than 63% from here. Then, the table shows how much of the company's net debt could be paid back, based on the Q2 amount of $4.38 billion, and assuming borrowings are paid back at par. Obviously, any debt discounts would help the company a bit here.

Dilution Table

Dilution For Debt Payback (Author's Estimation)

Given the 25 million share sale isn't likely to make a major dent in the debt pile, I am continuing to rate AMC shares a sell here. The company has a chance to turn things around in the coming years, but it is going to need a lot of help from moviegoers as well as a lot of dilution. If the outstanding share count doubles or triples again, I just don't see how shares can hold their current value. As a point of reference, the average price target on the street is $2.25 currently (pre-split), but that number could easily head lower as analysts put more dilution into their models.

As AMC gets ready for its reverse split and APE conversion, the fall in share price this week adds to the long term pressure the company is under. With the stock going from over $4 to around $2.50, the proposed 25 million share sale is now slated to bring in a few hundred million dollars less than previously hoped. This will mean that AMC will need to significantly dilute investors further if it wants to clean up its terrible balance sheet, which could send shares even lower moving forward.

Source: seeking alpha