There are some stocks that simply should not be bought. Some of the most common reasons are a declining business and a terrible balance sheet. While it might be tempting to see them as possible value stocks, their stocks could always decrease further as profits get worse.
AMC Entertainment (AMC) should be in this category. The stock has experienced a crazy year already in 2021 at near $2 before going to $20 by the close of January. Aided by the Reddit forum WallStreetBets, the shares got brought into the short squeeze that pushed other stocks like GameStop.
These types of moves are not predictable, and the stock is more than double where it began 2021. Investing in hopes of another move like this will likely only end in losses.
Bad business
AMC’s numbers were hurt by restrictions aimed to stop coronavirus. In Q3 of last year, revenue dropped by almost 91% down to $119.5 million, and AMC’s losses increased to $905.8 million all the way from $54.8 million.
And the company continues to face serious issues, including smaller time periods before movies can be seen on services like Netflix, which is hurting the movie theater business. In 2019, AMC’s movie revenue fell by over 2.5% to $3.3 billion. Revenue from food helped to offset this by increasing 2.9% to a total of $1.7 billion. But this increase came about because of AMC raising its prices, which will be difficult to do again in a down economy and among greater competition from video services.
Coronavirus is helping the momentum of movies being released on streaming services. For example, Warner Brothers plans to release its 2021 movie list directly onto their HBO Max right along with putting them into theaters. Walt Disney is taking a different approach, mixing theater releases with releasing movies on its Disney+.
This sets up a huge challenge for AMC since consumers now have many choices for watching new movies.
Debt-riddled business
Also, AMC has accumulated quite a debt pile. It might have escaped bankruptcy more than once in 2020, but that’s not a reason to buy shares in the company. The most recent financial event was in January when the company issued a $917 million debt-and-equity. With CEO Adam Aron saying, “Any discussion of bankruptcy for AMC is entirely off the table.”
Before its latest capital raise, AMC had $417.9 million in cash and $5.8 billion in debt. While its operating cash flow was -$771.6 million for the first half of last year.
So, while management did raise money, this will only postpone the hard reality. The company still must have a solid plan to turn things around.
With more ways to watch movies, that’s a hard order. Maybe AMC can pull it off, but I would not count on it.
Comments are closed.