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Stocks  | June 25, 2020

Movie theater operator AMC Entertainment Holdings (NYSE: AMC) has been riding a spectacular roller coaster in 2020. The stock is trading 59% below its 52-week highs even after bouncing 163% higher from the market bottom in March. The company expects to open some theaters in mid-July and the rest before the start of August, but AMC isn't collecting any revenue at all in the meantime.

If you're itching to pick up AMC shares at these low prices, I would suggest that you take a breather and wait until the three events listed below have taken place. Spoiler alert: It won't be easy, and I really don't expect AMC to stay in business much longer.

A Light At The End Of The COVID-19 Tunnel

I don't expect AMC to stay closed until every trace of the novel coronavirus has been wiped out, and investors shouldn't wait until we have both herd immunity and effective vaccines. I'm just asking AMC to figure out how to manage its movie multiplexes while observing CDC-approved guidelines on social distancing, virus-busting cleaning protocols, and mask-wearing.

The stepwise reopening in July comes with an improved cleaning program in partnership with Clorox (NYSE: CLX) and reduced screening crowds. Only 30% of each screen's seats will be for sale in the first phase of the reopening plan, followed by a 40% limit in the second phase. In theaters with reserved seating, AMC's ticketing system will leave empty seats between each party of ticket-buyers. Where seats aren't reserved, every other row will be blocked off.

The capacity should rise to 50% near Labor day and AMC hopes to resume business as usual somewhere around Thanksgiving.

This sounds reasonable enough on paper. Let's see how it works out in practice before jumping to conclusions, but AMC may have found a way to satisfy my first requirement.

That was the easy bit. It's all downhill from here.

Financial Stability

AMC was struggling to make ends meet long before the COVID-19 crisis came along. Ticket sales have been falling for nearly two decades, forcing AMC and friends to prop up their revenues through steadily rising ticket prices. The stay-at-home orders of the coronavirus era have accelerated the rise of digital streaming services, and it wouldn't surprise me at all if many avid moviegoers choose to stay home when the theaters are open for business again.

At the same time, AMC holds a stifling $10.5 billion of total debt and just $300 million in cash equivalents. Credit rating firms rate this company's ability to pay its debts deep in the speculative part of the spectrum, just a click or two away from "default imminent." They are also keeping AMC's credit rating on negative watch, expecting the situation to grow worse over time.

A Plausible Long-term Plan

Even if AMC manages to fill its theaters with paying customers before the end of the year, I'm not sure it'll be enough to stave off bankruptcy. The debt holders will come knocking, demanding payment for loans they never should have approved in the first place. AMC's financial troubles are not exactly fresh news.

Surviving the coronavirus pandemic is just a first step for AMC. Coming up with a viable business plan for the long haul is much tougher. The movie theater industry as a whole is teetering on the edge of a cliff. Cord-cutting consumers are ready to go elsewhere and film studios are already exploring how they can make it happen. Even the retail malls where you'll find most movie theaters are facing bankruptcies and shutdowns in an e-commerce trend that started many years before the COVID-19 crisis.

I wish I had some snappy idea on hand that could make the movie theater idea work for decades to come. Subscription-style ticket plans in the mold of Moviepass and AMC Stubs A-List could be a start, but only for keeping movie watchers in the theater. Turning a profit under that model turns out to be harder. Just ask Moviepass. If there is a way to make it work, I can't wait for AMC to find it and thrive. Unfortunately, that would be a massive surprise.

Until AMC can satisfy all of these requirements, I wouldn't touch the stock with a ten-foot popcorn bucket. Investors will lose every last penny if the company files for bankruptcy and share prices go to zero. That's the most likely endgame for AMC in my view, and I want you to avoid getting caught in that value trap.

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