AMC Entertainment Holdings Inc (AMC)

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It looks like the AMC insiders are not Apes!

AMC: Who's Profiting? Insiders Sell Hand Over Fist Amidst Retail Euphoria

Jun. 14, 2021

Summary

The meme stock revolution is real: at one point, AMC traded at an implied market capitalization for more than $30 billion.

While the Reddit shareholder base screams for a unified agreement to hold and not sell, company insiders appear to be selling as aggressively as humanly possible.

In 2021 alone, insiders have sold more than half a billion dollars worth of AMC stock.

In spite of the recent equity offerings, I continue to see a gloomy outlook for the company even as we come out of the pandemic.

AMC Entertainment (NYSE:AMC) has seemingly done the impossible: rise from the ashes of imminent bankruptcy and soaring to levels which value the company higher than the likes of Realty Income (NYSE:O) and Advance Auto Parts (NYSE:AAP) - combined. The company’s recent equity raises have improved the balance sheet, but is it enough to justify the current stock price? My fundamental analysis suggests not, and the fact that company insiders are aggressively selling their positions suggests that they agree with that fundamental assessment. We may be witnessing meme stock history with AMC, but this may not end well for meme stock investors.

AMC Stock Price

AMC had already seen its stock rise 500% until mid-May, when the stock rose yet another 500%. The stock is now a 25 bagger for the year.



AMC Short Squeeze

Is the rising stock price due to a short squeeze? It’s hard to say.

Short interest currently stands at just around 20%, and has remained around that level throughout the year. This isn’t like GameStop (NYSE:GME) which at one point had more than 100% of its shares sold short. If AMC’s rise was due to a short squeeze, then one might expect short interest to be declining as shorts cover, but that does not appear to be the case. This leads me to suspect that the stock price action might possibly be explained by a well-executed pump and dump, one which has drawn the attention of millions of Reddit investors. The potential for this to all just be a pump and dump is quite concerning, especially when one looks at who is really profiting from the rise in the stock price as I do later.

It’s also possible that the shorts are merely adding to their short positions as the stock continues to go up. Regardless of the reason for the runup in stock price, I instead focus on the fundamentals, which will inevitably prove most important in the long term.

Insiders Sell Like It’s Hot

There’s a saying that nobody knows how a company is doing better than company insiders themselves. That’s why it is concerning that company insiders seem to be selling at an aggressive rate. Will pent up demand help bolster the fundamental picture for AMC? Insiders don’t seem to think so.

Wanda Group, founded by the Chinese billionaire Wang Jianlin, sold 30.4 million shares between May 13 through May 18 for approximately $427 million. This is in addition to having sold 15 million shares for approximately $220 million back in March. Wanda formerly used to be the majority shareholder in AMC - it now owns only 0.002% of shares outstanding. It is ironic that the stock has risen around 4 times since then, in spite of the disturbing realization that AMC shareholders have redistributed their wealth to effectively bail out a Chinese conglomerate to the tune of over $600 million in 2021 alone. Wanda’s stake in AMC might have ended up completely worthless had the company filed for bankruptcy reorganization last year.

Other company insiders are aggressively selling as well. We can see below that AMC roll call seems to include selling significant chunks of stock.




While the AMC investor base screams slogans such as “HODL” (stands for hold) in hopes that their collective efforts will lead to the “MOASS (mother of all short squeezes),” it appears that AMC executives are instead taking advantage of the current bubble to line their own pockets.

Fundamental Outlook

AMC’s management deserves credit for issuing stock during this run-up. AMC was able to opportunistically raise $1.2 billion through equity offerings in the current quarter alone. That brings its cash position to [/chart]approximately $2 billion versus $5.5 billion in debt and $4.9 billion in operating lease liabilities. It can definitely be considered somewhat of a modern miracle, as AMC entered 2020 with $4.5 billion in net debt - somehow this number has come down temporarily to $3.5 billion. I say temporarily because AMC is likely still burning cash even amidst a box office recovery. AMC was burning $120 million per month in the first quarter. Considering that AMC generated $358 million in adjusted free cash flow in 2019, I estimate that AMC has to see business return to within 90% of 2019 levels just to reach a cash flow neutral state - and that is before accounting for the high interest debt.

Moving forward, AMC’s ballooning share count (which stood at 501.8 million as of June 2) will put headwinds on the stock price. What's more, those hoping that AMC would be able to use its cash to pay down high interest debt may be disappointed. As we can see below, the debt issues with yields over 10% are all secured debt, meaning that it is highly unlikely if not infeasible for AMC to buy them back early.

This is particularly concerning when considering that in spite of the roughly equivalent gross debt balance as compared to the prior year, AMC’s projected interest expense is approximately 70% higher courtesy of having replaced much of its former debt with higher yielding debt issues (in millions).



I find it unlikely for AMC to recover quickly to 2019 levels, if ever. My base case is for AMC to return to only 80% of 2019 levels, at which point it would be burning upwards of $300 million in cash every year even prior to accounting for capital expenditures.

But let’s say for the sake of argument that AMC is able to offset declines in theater attendance with price increases and is thus able to return to pre-pandemic levels. It should not be ignored that AMC was not profitable in 2019.

Throw in the projected $158 million in increased interest expense, and it appears that AMC will not have adequate cash flow (if any) to service its debt, even if it recovers to pre-pandemic financial levels. Again, for the sake of argument, let's assume that AMC is able to not only recover to pre-pandemic levels, but is also able to generate 10% higher gross profits than 2019. In this scenario, AMC would generate $355 million in additional gross profits, which would lead to $200 million in additional net earnings after accounting for increased interest expense. That all leads to $100 million in annualized net earnings. Based on 501.8 million shares outstanding, AMC would be earning $0.20 earnings per share. What would be an appropriate earnings multiple? I’d argue that a low-single digit multiple would be appropriate due to the long term secular headwinds facing the movie theater industry. Even a stock price of $1 would not be out of the question, considering that earnings would face downward pressure and the company would likely have to be continuously paying down debt and investing heavily in capital expenditures. However, even if we apply a generous 20x earnings multiple, then we still arrive at a stock price of $4 per share.

In other words, even using apparently unrealistically optimistic assumptions regarding forward operating metrics, AMC’s current stock price cannot be supported by fundamentals.

Long Dated Put Options

Because I remain skeptical of AMC’s ability to generate positive cash flow even upon a pandemic recovery, I continue to see a bankruptcy reorganization as being inevitable. The recent stock offerings may have delayed any bankruptcy filing, but it may not be enough for the company to avoid one. I am loath to directly shorting the stock due to the prospect of unlimited losses. Instead, I prefer to express bearish positions through buying long dated put options. For example, one can purchase the put option expiring January 2023 with a strike price of $4 for around $0.80 each. This means that one would profit if AMC trades below $3.20 some time before January 2023. If AMC enters a reorganization, then the stock price might decline to around $0.20 per share, at which point one would have earned 375% on invested capital. On the other hand, if AMC does not close below $4 per share by January 2023, then one would lose 100% of their invested capital.

Risks

Perhaps other movie theater chains may close down before AMC, which may enable it to take market share. In such a scenario, AMC would benefit through either increased traffic, higher prices, or both. I find such a scenario to be unlikely, as it seems unrealistic to think that moviegoers would want to drive even farther to get to the theaters, considering that many find it inconvenient even by today’s standards. Still, though, this should be considered a very important bullish thesis.

AMC may be able to raise more cash through issuing equity. While AMC does not have significant, if any, shares available to sell this year, it has filed to ask shareholders for the right to increase its authorization by 25 million for 2022. I view this to be the greatest threat to the short thesis. AMC’s recent equity offerings significantly damaged the short thesis as it has bought the company significant time to wait for a recovery. Further cash raised could help further reduce the debt balance.

AMC may be able to increase prices more aggressively than anticipated. This might occur irrespective of the aforementioned market share gains. Perhaps AMC determines correctly that those who are still eager about going to the movie theaters are not very price sensitive. AMC’s greatest weapon against declining theater traffic is increased prices.

Conclusion

Meme stock investors have exposed the inherent risk in shorting stocks, even if they appeared to be on the brink of bankruptcy, as was the case for AMC. Yet was this victory for the meme stock investors, or for the debt investors, which have suddenly seen the financial position improve dramatically. Perhaps the greatest winners have been the company insiders, who were able to sell over half a billion dollars worth of stock this year alone. Even accounting for the improved debt position, the stock still appears to be trading at levels completely unjustified by fundamental analysis. While it is theoretically possible for the stock to trade at whatever price the market dictates, if the company is unable to generate positive free cash flow soon, then the company may once again face the need for bankruptcy reorganization. I do not recommend shorting the stock, but buying long-dated put options may be an appropriate way to express a bearish position in the company. I rate shares a strong sell.