3 reasons to buy shares of AMC Entertainment and 1 to sell

There are a handful of stocks that are guaranteed to provoke heated debates in every room full of investors. AMC Entertainment Holdings (AMC -6.39%) is one of them.

The multiplex operator has been on a wild trip since the beginning of last year. Are you a bull? Are you a bear? Let’s look at three reasons why you might want to buy shares in the world’s largest exhibitor – and at least one strong argument for selling shares in memes.

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3 reasons to buy AMC

Let’s start with the obvious bull feather in the AMC hat. People are finally starting to go back to the movies. Paramount‘s (FOR -2.00%) Top Gun: Maverick broke records at the indoor box office for Remembrance Day weekend. A big problem for the industry so far – the one that explains why box office revenue has fallen by 42% so far compared to 2019 – is that hit movies have been few and far between. In 2020 and 2021, studios were reluctant to release their blockbuster candidates because the pandemic made it too difficult to lure crowds into cinemas. But Hollywood will end it all this summer.

This weekend you will see a consistent decline in the box office, but this may not be particularly, given the rave reviews that Top Gun the sequel received from critics and audiences. And the lull will not last more than a weekend. I’m waiting Jurassic World: Domination to launch huge ticket sales next weekend. Light year — on Toy Story spinoff – will attract young families to the local multiplex next weekend. That Light year The first weekend should be huge, as it will include three blockbusters, all of which will be in theaters in three weeks or less.

The second reason to buy AMC shares now is that the company is gaining market share. There are many reasons why he is an even stronger force in his industry than he was before the pandemic shutdown. Its appearance as a meme of shares helped – 4 million retail investors are there, actively talking about the brand. Besides, it only helps that AMC kept its cinemas open when rival Regal closed for the second time in late 2020 after the release of the latest James Bond film. There is no time to die, hit. Smaller players who lack AMC’s financial resources have also faltered, and AMC is slowly and selectively adding some of these rival movie theaters to its portfolio.

The third reason to buy this action now is that the cost per capita is high among movie buffs who come to its multiplexes. Apparently, the trip from the sofa in the living room to the cinema also makes many people hungry for the hot popcorn with butter, drinks and snacks sold at the concession stand. AMC also made its fortune during a lull at the box office, boosting mobile orders across the chain. Consolidated revenues from food and beverages per visitor are 40% higher than in 2019. This is quite a big deal, as the concession stand is the main center of profit for exhibitors. Most of the revenue from ticket sales for the new edition goes to film studios, but these high-margin sales of food and beverages belong only to AMC.

One reason to sell

The biggest reason for the red flag when it comes to AMC as an investment is its blurring. Through secondary share offers, management has increased its share five times since the pandemic began, and most of those shares were sold by the company during the darkest periods of the COVID-19 pandemic in early 2020. , at much lower prices than prevailing today.

This dilution stings in two ways. The less obvious way is that it prevents short squeezes. There are approximately 109 million shares of AMC Entertainment shares that are reportedly sold shortly at the moment. If this had been the case three years ago – when AMC had 103.8 million fully diluted shares outstanding – the short interest rate would have been more than 100%. With 515.9 million shares now, the short interest rate is about 21%. This is still high, but there is a lot of float to go through when squeezing.

The obvious reason why this huge dilution hurts shareholders is that every share now represents one-fifth of what it did before the pandemic. Let’s concretize the math. Revenue of $ 785.7 million generated by AMC in the first three months of this year is 35% below the $ 1.2 billion it provided in the first quarter of 2019. However, divide this revenue data into fully diluted units and You will see these earnings per share rose from $ 11.56 in the first quarter of 2019 to $ 1.52 in the first quarter of 2022 – a decline of 87%. You will see the same problem appear in the price-profit ratio when AMC finally becomes profitable again.

Are ascending catalysts sufficient to overcome concerns about dilution assessment? The long term will be a challenge, but I think there will be too many positive headlines for the film industry’s turnaround this summer to keep this exhibitor’s stock down for long.

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