Why the Odds of AMC Stock Winning Big Is Only 50%

Throughout the year, AMC Entertainment Holdings (NYSE:AMC) has traded within a wide range. Before the novel coronavirus shut down movie theatres, AMC stock struggled because the market was concerned about its enormous debt. But as U.S. states lifted their lockdowns during the summer, speculators gambled that movie attendance would rebound, causing the shares to climb.

Image of the entrance of an AMC Entertainment (AMC) branded theater. undervalued stocks
Source: Helen89 / Shutterstock.com

That scenario did not materialize.

Now AMC is racing against time to re-open its theaters and attract customers before it has to pay interest on its debt. It issued and sold shares to raise cash, buying some time. But should investors gamble on this stock ?

AMC Stock Is Approaching Its Lows Again

On Dec. 11, AMC said it would issue 21.9 million shares of its stock, raising around $152 million. The company held around $418 million of cash and cash equivalents on Sept. 30. But in October and November, it burnt around $125 million.

In the press release announcing the sale of its shares, AMC said “the Company anticipates that existing cash resources will be depleted during January 2021. To remain viable through 2021, the Company currently estimates that it will require at least approximately $750 million of additional liquidity to fund its cash requirements.”

As shown below,  AMC Entertainment stock receives weak scores on all metrics. And the company scores especially low on investors’ sentiment towards its stock:

AMC Stock Score

AMC stock scores poorly on all counts.

Chart courtesy of Stock Rover

The 18 out of 100 sentiment score reflects the stock’s recent plunge from the $4.00 – $5.00 range to $2.33 as of this afternoon.

For AMC stock to rebound, the number of new daily cases of the coronavirus will have to ease in the U.S. And since America is posting record infections and deaths, the crisis probably won’t peak anytime soon.

The recent rollout of two vaccines for the coronavirus, however,  brings hope that the world will get control of the pandemic. Still, distributing the vaccine quickly and efficiently is proving to be challenging for the U.S.

Liquidity Injection

AMC Entertainment’s receipt of $100 million from Mudrick Capital has actually hurt the shareholders of the theater operator. But the alternative is worse for AMC. Without the cash, it would need to declare bankruptcy, wiping out its shareholders and punishing its debt holders.

The firm previously re-negotiated its leases with its  landlords. Specifically, it agreed to share the revenue from its ticket sales in return for paying little or no rent.

Real estate investment trusts (REITs) are already anticipating that underperforming theatres may not survive. REITs like Realty Income (NYSE:O) will write down the leases of theatre chains that are unable to pay their rents. Still, over the longer term, movie theaters’ outlook will improve. The consolidation of the industry will eliminate the underperforming chains, while the profitable ones will thrive.

AT&T’s (NYSE:T) studio unit and its competitors said that they would simultaneously release movies in theatres and on streaming channels. That strategy, however, is temporary. If the world finds a way to beat the coronavirus and prevent it from spreading further, then theaters should be able to once again get access to movies before the streaming channels.

Fair Value

On Wall Street, no analyst has a “buy” rating on AMC, while four give it a “hold” rating. Their average price target on the shares is $2.51, according to Tipranks. The stock will likely move down to the $1.55 level or up to $3.50, depending on the market’s optimism about the coronavirus vaccine. If consumers become more confident in the vaccine,  theater attendance would grow, lifting all theater-chain stocks.

But instead of betting on AMC, whose heavy debt of over $2 billion weighs on its prospects, investors could buy Cinemark Holdings (NYSE:CNK) or IMAX Corporation (NYSE:IMAX) instead. IMAX does not face bankruptcy risks and would also benefit from a rebound of theater attendance. Cinemark is reportedly eyeing AMC’s theaters. It would get a good deal on them if AMC shuts down its weakest theaters.

The Bottom Line on AMC Stock

AMC Entertainment is a heads or tails type of trade. Either the stock bounces back and rewards speculators with an easy gain or it will fall and fail to recover. Investors should stay away from this company, since its prospects are unpredictable at this time.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Article printed from InvestorPlace Media, https://investorplace.com/2020/12/why-the-odds-of-amc-stock-winning-big-is-only-50/.

©2021 InvestorPlace Media, LLC