AMC (NYSE:AMC) reports earnings on August 1st. The Leawood, Kansas-based theater chain has become the largest in the world with over 10,000 screens across the U.S. and Europe. AMC stock has suffered since its IPO in 2013. The purchase of Carmike Cinemas in 2016 and the massive losses in 2017 both dealt a blow to AMC.
The earnings report could signal the comeback that could finally place AMC on a path to growth. Still, a highly-levered balance sheet could indicate a need for caution despite the growth.
Wall Street Will Focus on Earnings Guidance
Wall Street expects earnings for AMC at 8 cents per share. This comes after losing $1.35 per share in the same quarter last year. They also expect quarterly revenues to rise to $1.43 billion, representing an increase of over 19% from last year when the company brought in $1.2 billion.
Still, Wall Street will likely focus on the future. Investors will want to see that consensus growth remains on track or moves higher. Analysts predict 14 cents per share in earnings for 2018. So far, Wall Street expects earnings growth to reach 45 cents per share in 2019 and move to 75 cents per share in 2020. Hopefully, the earnings report will give investors assurances that profit forecasts for AMC stock remain on track.
Subscription Service Renews Interest in AMC Stock
The growth driver for AMC stock does not come from its most direct competitor Cinemark (NYSE:CNK), or even indirect competitors such as Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) or Amazon (NASDAQ:AMZN). Investors see a bright future because it has improved upon the movie theater subscription model created by Helios and Matheson Analytics’ (NASDAQ:HMNY) MoviePass.
HMNY stock recently needed a reverse split and a cash infusion to stay viable after failures with its MoviePass subscription service. AMC responded by creating Stubs A-List. The problem with HMNY is it did not own any assets. Hence, the workability of MoviePass placed it at the mercy of the movie theaters. Since AMC controls their theaters, customers need not worry about theaters rejecting the service. AMC will also charge more for the service, $20 per month vs. $9.95 per month for moviepass.
Stubs offers three movies per week vs. every day for moviepass. However, even avid moviegoers rarely see movies more than three times per week. Furthermore, Stubs will allow users to go to 3D or IMAX movies. Moviepass requires extra fees for those types of films. Subscriptions give the theaters the benefit of steady income streams. Also, people coming to the theater more often should mean more spending on concessions, the largest profit center of the theaters.
Financial Risks Remain for AMC Stock
While growth numbers may draw investors, investors should look at the debt. The company appears to have financed this dividend in recent quarters by increasing debt. Debt rose from $1.92 billion in 2015 to $3.75 billion in 2016. Much of that stemmed from the $1.2 billion purchase of Carmike in 2016. Still, debts grew to over $4.24 billion as of the end of the last quarter. This creates a dangerous situation as the company’s market cap stands at just under $2 billion.
Moreover, AMC stock still pays an annual dividend of 80 cents per share. The dividend yield exceeding 5% might appeal to investors. However, most analysts expect yearly profits below 80 cents per share until at least the next decade.
The Bottom Line on AMC Stock
The focus for earnings on AMC stock will hinge on guidance. However, investors need to focus on all the company’s financials. Wall Street expects AMC to report its third consecutive quarterly profit in the August 1st announcement. AMC stock struggled with growth for years. The stock suffered further as falling box revenues coincided with a large acquisition in 2017. However, investors have signaled optimism over its subscription service as the first mover in this service.
The problems with AMC stock stem from the financials. Debt levels have increased recently and now stand at about double the company’s current market cap. Furthermore, AMC’s dividend better reflects the higher earnings the company saw before acquiring Carmike. Few expect earnings to return to the that level soon. Hence, AMC stock faces increased debt, dilution, or a dividend cut in the coming quarters.
AMC stock may have placed itself on the comeback trail. Still, with its current debt and dividend levels, investors should stay away until profits rise further or the dividend comes down.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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