Movie theater operator AMC Entertainment (NYSE:AMC) has seen its fair share of troubles since the onset of the novel coronavirus earlier this year. Contrarians might look at AMC stock today and consider buying it because it’s at such a low price.
However, not all beaten-down stocks are worth buying. Getting a low price isn’t the same as getting a good value. When it comes to AMC stock, buyers would only be catching a falling knife, and I don’t want to see anyone get hurt.
AMC stock is in a relentless downtrend, so it’s hard to justify a long position. Plus, the theater chain’s woes began prior to the coronavirus pandemic as film fanatics started using Netflix (NASDAQ:NFLX) instead of going out to see a movie.
Are the theater attendance numbers high enough to justify a long position in AMC stock? And, is the company’s recent capital-raising tactic a good sign or a bad one? We’ll answer those questions today, but first let’s begin with an assessment of where the stock price stands today.
A Closer Look at AMC Stock
I recommended avoiding AMC stock in a previous article on Oct. 1. At that time, the share price was around $4.65. I was trying to warn traders about buying the stock as it had been in a downtrend since the end of 2016, when AMC shares were trading near the $35 level.
Checking on the AMC share price during the morning of Oct. 28, I observed that it had fallen all the way below $2.80. If anyone ignored my advice and bought AMC stock at a higher price, he or she now has to make a tough decision.
There’s no shame in cutting your losses when a stock shows no signs of turning around. The bears are fully in control of the price action of AMC stock now. It’s important to know the difference between being a contrarian and just being stubborn.
Importantly, AMC stock has trailing 12-months earnings per share of approximately -$27. That’s pretty horrendous for a stock that’s below $3. Therefore, even at its drastically reduced price, I still don’t recommend trying to be a hero with AMC.
Lights Are on, but Nobody’s Home
AMC stock bulls might point out that 83% of the company’s U.S. theaters have reopened. I suppose that this is a good sign for the economy. But what does it mean for the company?
Frankly, the reopenings might not be enough to save the company. For one thing, the movies that people are looking forward to the most probably won’t be shown this year.
In many cases, movie studios have decided to postpone highly anticipated film releases until 2021. Or else, they’ve simply chosen to offer the movies on streaming video services and bypass the theaters altogether.
Moreover, theater attendance has been abysmal. In fact, compared to a year ago, attendance at AMC theaters has declined by 85% domestically and by 74% internationally.
Liquidity Crisis
Because the attendance figures are so poor, AMC could undoubtedly use some cash right now in order to help the company get through the crisis. Thus, the company announced a share offering in which AMC plans to sell up to 15 million shares of its Class A common stock.
With AMC’s third-quarter revenues declining by a whopping 91%, it’s understandable that the company would want to take strong measures to shore up its cash position.
Yet, printing up and selling millions of shares is bound to have a dilutive effect on AMC stock. Besides, selling tons of stock shares doesn’t help to get people’s butts in those movie theater seats. That’s the problem that AMC needs to solve.
While announcing the share offering, AMC issued a worrisome statement:
“In the event the Company determines that these sources of liquidity will not be available to it or will not allow it to meet its obligations as they become due, it would likely seek an in-court or out-of-court restructuring of its liabilities.”
AMC didn’t use the word “bankruptcy” in that excerpt. However, we have to read between the lines here. When we consider what a “restructuring” of the company’s liabilities probably entails, the possibility of a Chapter 11 filing seems very real.
The Bottom Line
AMC stock holders might blame the pandemic or Netflix for the company’s problems.
Given the poor attendance numbers and the specter of bankruptcy looming, however, it’s time to stop playing the blame game and just cut your losses.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
