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Stocks, Trading  | September 2, 2021

AMC CEO Adam Aron — leader of the AMC ape army — may want to skip reading the latest take on his company's stock from one of the few remaining sell-side analysts that covers the movie theater chain.

On Wednesday, Macquarie analyst Chad Beynon cut his rating to Underperform from Neutral on AMC. Beynon didn't pull any punches on what fair value should be for AMC: $6 a share, or 87% from current levels.

The downgrade reflects two key considerations by Beynon, an admitted movie buff. First, box office receipts will continue to be lackluster due to the ongoing COVID-19 pandemic. And two, AMC's fundamentals stink — and will remain stinky amid those sluggish box office receipts.

"There are a multitude of reasons why domestic box office (DBO) performance hasn’t recovered (product, shrinking windows, COVID restrictions, etc), but the bottom line is that recent weekly revs are still down 30%+ vs ’19 comparable period, while most out of home entertainment options have recovered much faster. While the slightly shortened window remains an ongoing question, we are more concerned with the number of mid-tier release movies, which could hurt the $50-100m DBO movies," Beynon said on the state of the industry.

He added on AMC, "Looking forward, fundamentals are nowhere near where shares are trading given the company carries deferred rent of $420 million (2Q21) in addition to its annual rent expense of $1 billion; normalized maintenance capex is ~$140 million, and annual interest is ~$420 million. Overall, we do not see the company generating positive free cash flow until 2023 and believe there are other ways to own the theatre space."

The company showed little in the second quarter to suggest its fundamentals will materially improve headed into year-end. And even if they do improve noticeably, it will likely be difficult to justify AMC's lofty $22.2 billion market cap that has been pushed higher by the meme stock army.

For the six months ended June 30, AMC's sales fell 38% to $593 million. The company's operating losses clocked in at $724.7 million.

Says Beynon, "AMC remains a riskier investment, given rent obligations, higher leverage and a difficult margin trajectory following a more normalized recovery."

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