AMC Entertainment (NYSE:AMC) reported results for its fourth quarter on Feb. 1. They were some of the theater chain’s best results in recent memory. AMC stock gained more than 10% on the news.
“AMC’s 2021 results improved significantly as the year progressed, and we finished the year with the strongest quarter in two years,” AMC CEO Adam Aron stated in the company’s news release.
“The fourth quarter of 2021 marks a meaningful milestone with positive EBITDA of more than $145 million, positive Operating Cash Generated of more than $215 million, and a record year-ending liquidity position of $1.8 billion.”
Although it appears AMC has made strides in the right direction, the final part of Aron’s comments about liquidity stick in my craw.
Here’s why.
AMC Stock Gets Temporary Relief
While AMC stock gained more than 10% on the news, its share price has been trending down for some time. Over the past six months, it’s lost 58% of its value. As a result, it now trades just $3 above its share price in May 2021, when the gravy train began for AMC’s CEO.
Of course, Aron will be confident of the company’s progress. Selling the AMC story has made him a wealthy man. Aron sold more than $40 million in stock in the last three months. As I’ve said in the past, it’s a nice retirement gift from retail investors.
But if you think about it, all the CEO has accomplished over the past two years is keep AMC from going bankrupt. He hasn’t developed a way forward that diversifies its revenue streams.
As for liquidity, AMC finished the fourth quarter with $1.8 billion in liquidity, comprised of $1.59 billion in cash and cash equivalents, along with $209.1 million left on its $225 million credit facility.
That’s temporary relief, in my opinion.
AMC Lowers Its Interest Expense
On Feb. 2, it announced that it was selling $500 million in first lien senior secured notes due 2029. While the press release doesn’t mention interest rates, presumably it will be less than 10.5%, the rate it pays for similar notes due 2025. AMC plans to use the proceeds plus cash to redeem its 2025 notes.
I’m not going to argue with the move. It extends out $500 million of its long-term debt by four years while reducing its annual interest expense.
However, AMC’s biggest problem is too much debt and negligible profits.
At the end of September, AMC had $5.49 billion in long-term obligations at interest rates between 2.95% and 17%. In the fourth quarter, it paid $97.1 million in interest on this debt. On an annualized basis, that’s an average interest rate of 7.1% [$388.4 million divided by $5.49 billion].
Assuming it can lower its interest rate on the $500 million from 10.5% to 6.5%, that would reduce the average interest rate to 6.7% [$500 million multiplied by 10.5% less $500 million multiplied by 6.5% equals $368 million in interest on an annualized based multiplied by $5.49 billion].
Even if it used 100% of its cash to pay down its long-term debt, it would still have annual interest payments of $261 million [$4.59 billion less $1.59 billion in cash multiplied by 6.7%].
The Bottom Line
At the height of AMC’s business success in 2018, as judged by revenues ($5.46 billion) and operating profits ($265 million), the company’s annual interest payments were $262.3 million, leaving $123.7 million in pre-tax profits, or 2.3%.
That’s as good as it gets.
Even with the reduction in interest costs through the redemption of the 10.5% notes, its interest costs remain 40% higher than in 2018, its proverbial heyday.
With interest rates headed higher and AMC delivering no plan for growth other than post-pandemic re-openings, I don’t see what will move AMC stock higher other than irrational exuberance.
Do not buy into Aron’s liquidity game. It’s one you will lose, and he’ll ride off into the sunset with $40 million in his pockets.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.