Description

Thesis

For the second time this year, AMC shares went parabolic last week on incredibly high equity volume and extraordinarily high call option volumes. Like the spike in late January, last week’s spike coincided with parabolic moves in other “meme” stocks like Beyond Meat and Gamestock. Influencers added fuel to the retail mania by encouraging more people to participate. While AMC’s revenue and EBITDA are almost certain to improve materially from 2020’s deeply depressed levels, AMC’s current stock price has more than priced in a complete recovery. Meanwhile, movie theaters remain a secular decline industry and AMC remains significantly over-levered. Trading at 22x 2019 EBITDA levels, AMC shares have significant downside from current levels. Pre-pandemic AMC shares traded between 7x and 10x forward EBITDA and generally toward the lower end of that range. CNK -- AMC’s closest peer -- trades at a little over 7x 2023 EBITDA. If we assume AMC can recover 2019 EBITDA levels by 2023 and the shares trade at 10x EBITDA, the shares would be worth around $7/share; at 7x EBITDA the shares would be worth around $2/share. While AMC has a reasonable borrow rate, borrow availability has tightened up in recent days. With AMC implied volatility having blown out to over 300%, we believe the best way to express this trade is to short AMC call options. For example, AMC June $30 calls can be sold for $6.50. When the mania burns out over the next week or two, AMC implied volatility should collapse along with the share price causing the call options to collapse in price.   

Capital Structure

Source: Goldman Sachs

Note: the bond prices in this table are from May 7th and are out of date. 

AMC’s debt maturities are well spaced out providing the company with a relatively comfortable pathway to normalizing the business over the next 2 years. With its recently completed atm equity offering, AMC has sufficient liquidity to survive to the end of 2022 even if the business remained at Q1 levels (it should improve significantly with COVID related restrictions being removed.)

Since the onset of the pandemic, AMC Management has done an incredible job in averting bankruptcy by tapping the capital markets and selling assets. AMC is unlikely to go bankrupt as a result of the pandemic which is not something that could not have been said 6 or even 3 months ago. AMC has taken the following actions to shore up its liquidity position:

AMC’s share count pre-pandemic was around 104mm, it is now around 478mm! 

Company Overview

AMC has been written up numerous times on VIC over the years. Most recently, AMC bonds were pitched as a long by RSJ on 11/13/2020. That recommendation has turned out incredibly well and provides a good overview of how AMC dealt with its covid induced balance sheet crisis. 

This is how the company describes itself in its SEC filings:

AMC is the world’s largest theatrical exhibition company and an industry leader in innovation and operational excellence. AMC operates theatres in 13 countries, including the U.S., Europe and Saudi Arabia.

AMC theatrical exhibition revenues are generated primarily from box office admissions and theatre food and beverage sales. The balance of its revenues is generated from ancillary sources, including on-screen advertising, fees earned from our AMC Stubs® customer loyalty program, rental of theatre auditoriums, income from gift card and exchange ticket sales, and online ticketing fees. As of March 31, 2021, AMC owned, operated or had interests in 945 theatres and 10,518 screens.

“The Reddit Meme Stock Squeeze”

For the second time this year, AMC shares skyrocketed after the company completed an ATM equity offering. Last week, AMC was 11% of all trading volume on the NYSE on Wednesday, Thursday and Friday. The recent surge started around the time the company completed its most recent ATM offering (press released by the company on 5/13.) Trading has been manic over the past 2 sessions with AMC trading 705mm shares on Thursday and 660mm shares on Friday. Over the past week, trading volume in AMC calls also became manic. On Friday alone traders bought 4,199,006 call options in AMC -- over 11% of all options traded across all exchanges that day. 

Source: Bloomberg

The surge in the share price and trading volumes as well as the manic surge in call option activity has been highly correlated with reddit r/WallStreetBets posts about AMC. 

Source: Swaggy Stocks

In contrast to the late January surge in AMC’s share price, this rally has been cheered on by charlatans in the financial media like Jim Cramer. 

Adam Aron -- AMC’s CEO -- has also been using his social media to promote the company’s stock to retail shareholders. For example, while seeking authorization to raise the company’s authorized share count to over 1 billion shares, he did an appearance on “Trey’s Trades” a Youtube show. 

https://www.youtube.com/watch?v=XjqCaNKsSbc 

The AMC share price spike hasn’t really been a short squeeze as short interest has been flat to only slightly declining. It appears that the vast majority of the runup in the share price has been due to gamma squeeze dynamics due to the massive call option volumes. 

Source: Forbes

On the Q1 earnings call, management revealed that as of March 11th, AMC had 3.2mm retail shareholders who owned 80% of the company’s 450MM shares at the time ~140 shares each. AMC plays to its retail shareholder base. For example, a common meme involving AMC redditors involves Apes. AMC announced on its Q1 earnings call that it will be donating $50,000 to the Dian Fossey Gorilla Fund.

On the Q1 call, CEO Adam Aron said: “ Within the boundaries, of course, of the law, integrity and ethics as well as the exercise of wise judgment on behalf of all stakeholding constituencies, in the free market capitalist system, the shareholder is king. As I said before, the interests of our shareholders become our interests. The passions of our shareholders become our passions, too.”

Also on the Q1 call, Aron was asked about why he keeps playing to the retail investors and he gave the following response:

Meghan Durkin, Crédit Suisse AG, Research Division - Research Analyst [7]

 Adam, I wanted to ask about the new shareholder base quickly. So how do you see this going? I mean if management thinks that increasing the share authorization is the best move for the company but the new shareholders don't, then what is the way forward from there?

 And then for Sean, a quick one. Are you still expecting to cross over and turning cash flow positive in 4Q '21? That's it for me.

Adam M. Aron, AMC Entertainment Holdings, Inc. - President, CEO & Director [8]

 Thank you, Meghan. I'll take the first one. If management thinks something and the owners of our business think something else, in the free market system, guess who wins. Guess who always wins. The owners of the business because the management work for the owners.

 Now we can try to explain and we can try to persuade. And we can also listen and we can adjust our strategies. There are a lot of ways to skin a cat. And I'm quite optimistic about the new shareholder base of AMC. Just go on Twitter, just go on Reddit, just go on YouTube. Read what these people write. They love AMC. This is -- and these are not people who are just going to be investors in AMC, these are going to be customers of AMC who come to our theaters and enjoy watching movies at our theaters as paying guests.

 So I love the idea that we have a passionate, committed, enthusiastic shareholder base. And I'm sure that as we work together, management and ownership, we'll come to the right answer. Look at what we've achieved as I -- the whole point in my prepared remarks. Look at what we've achieved in the last year, we're going to achieve good things in the next year and the year after that, too.

 The only thing that will be different though is before when I wanted to talk to the company's ownership, I could fly to Beijing and I could sit down with 3 or 4 people, and they have 75% of the votes, or I could talk to some of you, analysts, who were in frequent contact with people who also had huge percentage votes of our company's shareholding base. We go on non-deal road shows with you all and meet this institutional investor, that institutional investor and make our case and make our pitch.

 Well, it's going to be a little different now because I don't have 5 people in 1 office, I don't have 15 securities analysts who talk to all these institutions. We've got 3.2 -- I would say we have as on March 11, we have 3.2 million people who we're going to have to talk to, to explain what the company is up to, what the company is doing, what the company wants to do, why we want to do it, how it impacts them and do they agree with it.

 And so you're going to see a lot more outreach to literally millions of investors in our company, and it's going to be quite public. I've started tweeting again. Back when I ran the Philadelphia 76ers, I was tweeting 15 times a day. And I don't think I've tweeted 15 times a year in the last 5 years at AMC, but I started tweeting again. And we are communicating with our shareholder base. Some of you saw -- may have seen a YouTube interview that I did.

 Try getting 4 minutes on CNBC. That's pretty hard. Well, we got 90 minutes on YouTube, and it had 250,000 views. And on YouTube, they get to grade it. They give you a thumbs up or a thumbs down. And the last time I looked, over 20,000 people took the time to rate it, this 90-minute interview, and 99.4% of them gave us a thumbs up. 

During AMC’s “meme stock” rallies, insiders have dumped millions of shares and the company has sold hundreds of millions of shares (mostly for under $5/share.) Dalian Wanda Group -- who had been AMC’s controlling shareholder, sold out of its entire position by the end of May 2021. In the January squeeze, Silver Lake converted its convertible debt and sold all of the shares. Recent insider sales have included:

Fundamentals

The movie theater industry peaked in terms of attendance in 2003 and has been in secular decline ever since. Pre-pandemic, movie theater operators kept box office growing by raising ticket prices every years. 

Source: The Numbers - Movie Market Summary 1995 to 2021 (the-numbers.com)

Pre-pandemic, the average movie ticket price was $9.16 with major metropolitan areas like NY and LA having ticket prices approaching $20 per person. The ability to raise ticket prices further is likely limited by the proliferation of streaming services at monthly price points that are at parity if not less than the price of an average ticket. In addition, the studio run streaming services have been testing simultaneous release of new movies as an add on purchase for their streaming services in addition to airing in the theaters (or in HBO’s case having the first run movies included in the price of the streaming service.) It is already dramatically cheaper for a family of 4 to watch a new release movie on Disney+ for ~$30 than to go to the theater. Why pay $20 to see 1 movie when you can pay $17.99 a month for a premium netflix subscription? 

2020 was obviously a terrible year for the movie business given the pandemic shut down most theaters in the country. That said, fundamentals for the movie theater business are rebounding off of the horrific levels of 2020. Movie theater capacity limits are set to be eliminated in NY and CA in the coming weeks and likely nationwide by the end of Q3. The studios are slated to release new blockbuster films like Fast & Furious 9 on June 25th and Black Widow on July 9th. Other blockbuster movies like the new James Bond and new Spiderman films are due to be released later this year. Recent credit card data showed that spending at AMC was only down around 45% versus 2019 during the opening weeks of Godzilla vs. Kong suggesting that people will return to the theaters for blockbusters. 

AMC’s financials took a sizable hit from the pandemic. Sell side analysts model the company returning to roughly 2019 levels of revenue and EBITDA in 2023. 

Source: B Riley

Source: Goldman Sachs

In Q1 2021, AMC’s monthly cash burn was roughly $120mm with March being a cash burn of around $75mm. AMC had $473MM in deferred rent payments at the end of Q1 with an average repayment term of 27 months. This means cash rent will exceed income statement rent for likely the next 2 years. We anticipate the company returning to close to a free cash flow neutral position in the summer of 2022. 

Pre-pandemic, AMC had an annual capex spend of $400mm to $500mm. AMC cut capex to $174MM in 2020 and has guided to 2021 capex of $100MM and 2022 capex of $100mm to $150mm. It’s not clear how long AMC can continue to underinvest in capex. Cash interest rises to $340mm by 2023. So long as AMC can keep its capex down, the company could generate free cash flow. 

A simple view of AMC’s free cash flow over the next 3 years shows the company returning to a slightly positive level of free cash flow in 2022 allowing the company to normalize maintenance capex in 2023. 

Valuation

Pre-pandemic, AMC shares traded between 7x and 10x next 12 months EBITDA with the company trading mostly between 7x and 8x for most of 2018 and 2019. 

Source: Sentieo

Cinemark (CNK) -- AMC’s closest competitor -- has not experienced the same level of share price appreciation as AMC. CNK’s shares currently trade at 7.0x 2023 sell side EBITDA estimates. Over the past 12 months, AMC shares have appreciated by 409% while CNK shares have increased by just over 50%. The differential performance between the 2 highly comparable companies is a strong reflection of the extent to which technical factors and short term trading dynamics have influenced AMC’s share price this year.

If we assume AMC burns another $550MM between now and the end of 2022, and the company doesn’t issue any more shares then at a 2023 EBITDA assumption slightly above the 2019 level of $771MM (let’s say $800MM) the share price would trade at $1.62/share if the stock had a 7x EBITDA multiple and $6.64/share if the stock had a 10x EBITDA multiple. Under this set of assumptions, the current share price equates to a 21.6x 2023 EBITDA multiple. 

Borrow

AMC borrow costs have mostly been below 10% since the January short squeeze. Borrow availability had been relatively plentiful until the parabolic move in the share price over the last couple of days.

Source: iborrowdesk.com 

AMC implied volatility blew out at the end of last week ending the week at around 300% almost triple the stock’s 30 day historical volatility. 

Source: Fidelity

Risks

With vaccination and “normalization” in the U.S. appearing to be progressing more rapidly than initially anticipated it’s possible that AMC’s recovery towards the pre-pandemic audience trends occurs faster than expected. Earnings are likely to “beat” in the next couple of quarters as studios start to release their backlog of blockbuster films. 

Nothing prevents another “gamme squeeze” from occurring once implied volatility returns to more normal levels though the stock price likely collapses from currently elevated levels before that will occur. When options prices blow out it becomes prohibitively expensive for the gamma squeeze strategy to continue which usually causes the gamma squeeze to end.

Management reneges on its promise not to sell additional shares this year (perhaps by doing a large convert) and uses the proceeds to further pay down debt and reduce the company’s onerous interest expense. Of course this is predicated on management finally getting the approval from the company’s shareholders for the issuance of up to 500 million more shares. As long as retail punters are willing to buy as many shares as they can at elevated prices, management should sell as many shares as possible or try to exchange equity for any many bonds as possible. 

Catalyst

Retail "meme stock" traders get tired of this and move on to the next thing.

Higher implied volatilities make continued gamma squeeze prohibitively expensive causing options volumes to die down

Company exchanges debt for equity or does another at the market equity issuance once the company gets approval to issue 500mm more shares

Financial media influencers stop pumping the stock