As a theatrical exhibition company, AMC Entertainment Holdings Inc. (AMC) owns, operates, and has interests in theaters in the United States and worldwide. The company operates through two segments: U.S. Markets and International Markets.

On January 31, AMC announced that following the successful launch of movie theatre operations in the Kingdom of Saudi Arabia, it has reached an agreement to transition from a management and investment role in the Saudi Cinema Company (SCC) to a pure licensing relationship.

The current AMC Cinemas and future locations would be operated by SCC, formed through a partnership between AMC and Saudi Entertainment Ventures (SEVEN). It will retain the AMC Cinemas name and other Ips through a licensing agreement.

As part of the agreement, SEVEN will buy out AMC’s $30 million investment in SCC.

However, AMC’s stock has lost 3.1% over the past month and 68.5% over the past six months to close the last trading session at $4.68, below its 50-day and 200-day moving averages of $5.37 and $9.95, respectively.

Despite the slump, the stock’s forward EV/Sales and EV/EBITDA multiples of 2.98 and 182.28 are significantly higher than the industry averages of 2.05 and 8.79, respectively.

Given the challenging macroeconomic climate amid increasing interest rates and fast-changing consumer behavior, let’s closely examine the factors that could put further pressure on the stock despite occasional short squeezes and bear market rallies.

Dilution of Equity and Increasing Debt Burden

In December 2022, AMC announced a $110 million equity capital raise by selling AMC Preferred Units (APE) to Antara Capital, LP, at a weighted average price of $0.660 per share. The company also sought a special shareholder meeting to vote on its proposal to convert APE units into AMC common shares and reverse-split the number of AMC common shares at a 1:10 ratio.

This announcement closely followed AMC’s December 19 announcement that it had raised $162 million of equity capital through sales of 125.9 million AMC Preferred Equity Units.

In October 2022, AMC’s Subsidiary Odeon Finco PLC announced that it had completed its private offering of $400.0 million aggregate principal amount of 12.750% senior secured notes due 2027 at an issue price of 92.00%. Exposure to expensive debt in a rising interest rate environment may hinder the company’s bottom-line growth.

Weak Financials

For the third quarter of the fiscal year 2022 ended September 30, AMC’s adjusted EBITDA loss widened 138.9% year-over-year to $12.9 million, while its net loss widened 1.2% year-over-year to $226.9 million. This resulted in an adjusted quarterly loss of $0.20 per share.

Lack of Profitability and Inefficient Asset Utilization

AMC’s trailing-12-month gross profit margin of 10.73% falls remarkably short of the industry average of 49.65%. Similarly, its trailing-12-month EBITDA and net income margins of 2.82% and negative 20.05% also compare unfavorably with the respective industry averages of 19.46% and 3.25%.

AMC’s trailing 12-month return on total capital (ROTC) of negative 2.06% is strikingly lower than the industry average of 3.70%. Likewise, the company’s trailing 12-month return on total assets of negative 8.91% compares unfavorably to the industry average of 1.77%.

Discouraging Analyst Estimates

Analysts expect AMC’s loss per share for the fourth quarter of the current fiscal year (ended December 2022) to widen 72.7% year-over-year to $0.19. Additionally, the company is expected to keep reporting losses over the next two fiscal years.

POWR Ratings Reflect Fundamental Weakness

AMC’s overall D rating translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMC has a grade F for Sentiment consistent with bleak analyst estimates and bearish price action.

The stock also has an F grade for Stability, as reflected in its beta of 2.06 and the substantial spread between its 52-week high and low prices of $34.33 and $3.77, respectively.

Unsurprisingly, AMC is ranked penultimate of six stocks in the Entertainment – Movies/Studios industry.

Click here to see additional POWR Ratings for Growth, Value, Momentum, and Quality for AMC.

Bottom Line

In addition to the factors listed above, on February 6, AMC announced Sightline, a program that offers moviegoers differential pricing for seats based on sightlines to the movie screen. The segments in which the seats would be priced are Value Sightline, Standard Sightline, and Preferred Sightline.

While this initiative would help provide more value to its customers, it does little to address the broader issue of the preference of the majority of customers shifting from going to the theater for movies to streaming them from the comfort of their homes.

Hence, AMC appears to be a falling knife with significantly greater downside risks than upside potential.

How Does AMC Entertainment Holdings, Inc. (AMC) Stack up Against Its Peers?

AMC has been rated D, equating to a Sell. While the F-rated Entertainment – Movies/Studios industry has just six stocks, you may check out these a C (Neutral) rating: Warner Music Group Corp. (WMG), Lions Gate Entertainment Corp. (LGF.A), and IMAX Corporation (IMAX).

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AMC shares were trading at $4.50 per share on Tuesday afternoon, down $0.18 (-3.85%). Year-to-date, AMC has gained 10.57%, versus a 7.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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