AMC Entertainment May Be a Buy, But Not At Its Current Price

Although GameStop (NYSE:GME) is perhaps the best known of the “meme stocks” to go parabolic in January, it wasn’t alone. Shares of AMC Entertainment (NYSE:AMC) also got a jolt as the Reddit crowd attempted to implement a short squeeze. That said, this presents a good news/bad news scenario for AMC stock.

Image of the entrance of an AMC Entertainment (AMC) branded theater. undervalued stocks

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First, the good news: the company will almost certainly be able to avoid bankruptcy for at least a few years. However, the bad news is that the Reddit rally gave AMC stock its vaccine injection right now.

Here’s what I mean.

Debt Has Been Bumped Down the Road

Like most entertainment companies, AMC spent the better part of 2020 playing defense. Part of this meant restructuring the company’s significant debt. Still, AMC entered 2021 with bankruptcy looming as a real option. This was particularly true since the company did not receive any of the $15 billion in funds earmarked for independent theater chains in December’s pandemic relief bill.

But that all changed when AMC stock was part of the mania that took over the market. According to CEO Adam Aron, AMC was able to raise enough capital to take bankruptcy “off the table.”

Still, the debt picture is not pretty. And the company is paying high interest rates to service that debt (up to 15%) which means it will cost well north of $300 million to pay the interest expenses.

However, the company was able to push back its debt maturities until at the earliest 2024. This will allow the company to reopen theaters. But there is a more immediate problem of $480 million in deferred rent that is going to have to get repaid at some point.

Will Movie Traffic Come Back?

This is the major question for AMC right now, and anybody that says they know for sure is lying. Any and all cockeyed optimism has to be tempered with the fact that movie traffic was dropping before the pandemic. There were many reasons for that. But I’m confident that only a small percentage of consumers considered the possibility of contracting an airborne virus as one of those reasons.

However, human behavior is a funny thing. The bullish case says that people may come back to the movie theater because they can. Call it nostalgia, or just the need to see a movie from anywhere other than their home.

Nonetheless, the evidence doesn’t necessarily bear that out. In December, a Morning Consult survey of 2,200 U.S. adults said slightly over half (51%) would not feel comfortable going back to a movie theater for at least six months.

Another glass half empty or half full insight from a separate Deloitte poll showed that, price being equal, 35% of respondents would prefer to go to the theater to watch a new release even if it were released simultaneously on a streaming service. But 42% of respondents in the same survey said they would prefer to stay home.

With all of that in mind, this illustrates the larger threat to AMC stock. Streaming companies have more leverage than ever before. This isn’t to say production companies won’t want to launch movies in theaters. However, they may very well mean give consumers the ability to “choose their own adventure” as far as viewing a new release in theaters or via streaming. And even for movies that go to theaters first, companies like AMC will likely have a shorter period of time in which those movies are exclusive.

AMC Stock Is Priced for Tomorrow

Throughout 2020, AMC stock was untouchable for obvious reasons. And nearly a year removed from the pandemic, I don’t believe the case for the company is hopeless.

The January rally certainly helped buy AMC time, but the stock is trading around the same price it was before the pandemic began. That’s simply too high without getting a feel for how much traffic is coming back.

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

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.

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