AMC Entertainment (NYSE:AMC) sold 11.55 million shares of AMC stock on June 3 at $50.85 a share. The stock sale raised $587.4 million in equity proceeds before fees. As a result of the sale, it now has 513.3 million shares outstanding, 10 times the amount a year ago.
Axios’ Felix Salmon recently discussed how the Securities and Exchange Commission (SEC) prevented Hertz Global Holdings (OTCMKTS:HTZGQ) from selling shares of its stock during bankruptcy proceedings. Salmon wrote that the SEC’s actions actually hurt the company and its investors. I say he’s wrong. Here’s why.
Valuation and AMC Stock
As Salmon mentioned, Bank of America has stopped covering both GameStop (NYSE:GME) and Bed Bath & Beyond (NASDAQ:BBBY) because their shares have no fundamental basis for their current valuations.
GameStop has a $19 billion market capitalization and Bed Bath & Beyond’s is $3.6 billion. As I write this, AMC’s is $27.3 billion. Let’s consider AMC’s valuation for a moment.
I went back through AMC’s financials through April 2, 2009. That’s 11 years of results. Its best year in terms of revenues was 2019, when it generated $5.47 billion in sales. Its highest operating profit was in 2018, when AMC made $265 million. Finally, the best operating margin was in 2015, when its operating profit of $237.1 million was 8% of its $2.95 billion in top-line sales.
Using 2015 as AMC stock’s baseline valuation, it finished that fiscal year with 97.44 million shares — 21.61 million Class A and 75.83 million Class B. It had a market cap of $2.31 billion based on a 2015 year-end closing price of $23.71.
AMC stock closed out 2015 trading at about 0.78x sales. If you assume the markets look six months ahead and use AMC’s March 2015 high of $36.13 per share, you get a market cap of $3.52 billion and a price-to-sales ratio of 1.19x.
As I write this, based on a market cap of $24 billion and 2019 sales of $5.47 billion, AMC stock is trading at 4.39x sales. When you consider its trailing 12-month sales are $450 million through first quarter 2021 and $1.24 billion for all of 2020, its P/S ratios should be 0.02x and 0.52x, respectively.
It gets even worse when you look at the analysts’ perspectives. Those covering AMC stock expect it to lose 95 cents in 2022 and 61 cents in 2023. Analysts expect 2022 sales of $4.79 billion, or about 88% of its 2019 pre-pandemic top-line numbers.
The Share Sale Scratches the Surface of AMC’s Debt
I have a hard time believing that AMC shareholders are better off because management was able to sucker enough people into buying shares at $50.85.
The sale of 11.55 million shares to raise $587 million will not cure AMC’s debt problem — a situation that’s gotten worse in recent years.
At the end of 2015 — arguably the best year in its history — the company had $465 million in long-term debt, which required $21.2 million in interest payments that year. Based on a year-end market cap of $2.31 billion, its long-term debt represented 20% of AMC’s market cap.
While manageable, its debt levels have skyrocketed in the years since. In part, that’s because accounting rules changed. Companies now have to list any future operating lease as a liability on the balance sheet. Still, AMC’s long-term debt rose to $4.73 billion in 2019, with an annual interest expense of $292.8 million.
AMC has never generated more than $265 million in operating income in a given year. So how is it going to cover the interest on its debt?
Diluted Shares Won’t Help AMC Stock Investors
If nothing else, the company’s stock sale gave it room to breathe. But I find it hard to believe that this will benefit investors in the long run. For example, at the end of 2015, if you owned 10% of AMC stock, you held 9.74 million shares. Those shares today are good for a 1.9% stake.
From where I sit, losing more than 80% of your ownership stake to dilution is hardly a cure. These stock sales will be the AMC shareholders’ undoing.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.