AMC Entertainment Holdings (AMC +3.06%), with about 1,000 movie theaters worldwide (63% in the U.S.), is the industry's largest company. Naturally, the coronavirus, which has forced the company to shut down theaters, has affected AMC. Investors won't know the full extent until later this month, since the company pushed back its first-quarter earnings release, which is typically in early May.
Unfortunately, AMC was confronting other issues before the pandemic struck, which the stock's poor return reflects. In fact, shareholders have suffered for quite some time. From the start of 2015 through the end of 2019, the share's total return badly lagged the S&P 500 Index. During that five-year time frame, the broad index returned about 74% while AMC lost about 63%.
Looking ahead, is this a value stock that is a compelling buying opportunity?
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Competition intensifies
Last year, revenue was flat, at $5.5 billion, while attendance dropped from 358.9 million to 356.4 million. Food and beverage, which rose partly due to price increases and menu changes, supported AMC's top line.
While management blamed the lower attendance on less popular releases, no doubt the company will continue to face challenges getting people into its theaters, which it ultimately needs to do in order to grow both admission and concession revenue. AMC is trying to fill the seats by spending money on renovations for things like reclining seats and enhanced audio and visual quality.
However, people love streaming and watching movies and other content at home. During the first quarter, Netflix gained 15.8 million paid subscribers, and management issued conservative second-quarter guidance calling for a still-buoyant 7.5 million additional subscribers. Other streaming services have also been launching, including Walt Disney's Disney+, AT&T's HBO Max, and Comcast's NBC Peacock.
Even before the pandemic, Netflix had been pushing to show movies faster on its streaming platform. Last year, The Irishman was released in theaters on Nov. 1 and was on Netflix at the end of the month. This trend will likely only accelerate after the pandemic, with more people subscribing to an increased number of streaming services.
AMC is drawing a line in the sand, refusing to show any of Comcast's (owner of NBCUniversal) films in its theaters after that company's management made comments indicating it would seek to shorten the time, or even release movies simultaneously in theaters and a premium video on demand service that allows consumers to pay a fee to view movies at home. AMC is facing an uphill battle fighting the home viewing trend with content providers. Ultimately, it is the content that drives people to the theaters. With the trend toward allowing people to watch movies where and when they want, AMC doesn't have much power to derail the train.
Lots of debt
In April, there was talk circulating that AMC was close to bankruptcy that got pushed back when the company raised $500 million in a secured debt offering later that month, albeit at an expensive 10.5% coupon.
While the company needed the funds, it does add debt to an already highly leveraged balance sheet. At year-end, there was $4.8 billion of debt (80% debt/total capital).
With the business already under pressure, the high debt load adds financial risk to AMC.
Is this worth the price of admission?
Reports emerged earlier this month that Amazon.com (AMZN +3.64%) showed interest in purchasing AMC, creating quite a stir. Even if it comes to fruition, there is no guarantee AMC shareholders will reap a bonanza. After all, the company is not negotiating from a position of strength.
For investors who are contemplating buying AMC shares, the key question is not whether Amazon is going to make a buyout offer. Rather, it is AMC's fundamentals as a stand-alone entity. With movie production companies shortening the time before films can appear on streaming services and a lot of debt, this stock is not worth the price of admission.
