- AMC Entertainment stock could see big downside as it resorts to dilution to pay down its debt, according to Wedbush.
- Wedbush cut its AMC price target in half to $2 per share to account for the new APE shares.
- "AMC would have to issue over 900 million shares of APE to repay its entire debt balance," Wedbush said.
AMC Entertainment is well positioned for a solid year ahead as the global box office heats up, but that doesn't mean its stock price will benefit, Wedbush said in a Tuesday note.
The investment research firm cut its AMC price target in half to $2 per share to account for the new "APE" preferred equity shares, which essentially served as a two-for-one stock split. The $2 price target represents potential downside of 81% from Monday's close.
But Wedbush sees fundamental improvements on the horizon for the movie theater chain despite an expected slow slate of new movies in the back half of the third quarter.
"AMC has plenty of cash to weather a two-month [movie] slump, and is well-positioned for a strong fourth quarter and 2023," Wedbush said, arguing that the company has gained market share thanks to an improved footprint and delayed movie theater upgrades by its competitors.
"AMC continues to right-size the ship by repaying and restructuring debt, acquiring more quality screens while removing underperforming screens, and making inroads into secondary revenue sources, including alternative content and retail popcorn sales," Wedbush analyst Alicia Reese said.
But AMC still has more than $5 billion in debt and hasn't posted a profitable quarter since 2019. That means dilution is likely around the corner as the company needs to raise cash to pay down its debt, and its new preferred equity shares could facilitate that in a big way, according to the note.
"While it makes little sense for APE to trade below AMC, we think that it reflects concerns over impending dilution. AMC is pre-authorized to issue up to 4.5 billion additional preferred shares of APE to raise cash," Reese said.
Ultimately, Reese expects AMC to wait for APE's share price to stabilize with AMC's share price before it issues a portion of authorized APE shares for cash to pay down its debt.
"We note that at the August 22 closing price of $6, AMC would have to issue over 900 million shares of APE to repay its entire debt balance. While AMC can issue up to 4.5 billion APE shares, we expect it to issue far less, and wait for a more opportune time to do so," Reese said.
Debt repayment would be a positive for AMC aas it would allow the company to accelerate its movie theater upgrades, expand its footprint, and would ultimately make the company "a more attractive long-term investment," Reese said, adding that it would even allow the company to reinstate its quarterly dividend sooner.
Finally, Wedbush said the potential bankruptcy of its competitor, Cineworld, shouldn't weigh on AMC as the weakness in its competitor is company-specific.
"AMC and Cinemark have gained market shares against Cineworld's domestic subsidiary, Regal, over the last two years, as Regal remained closed for much longer, and the latter two have recovered more quickly," Reese explained.
Still, while AMC is making the right moves to improve its balance sheet and grow for the long-term, the potential dilution means there is still a lot of downside in the stock price. Wedbush reiterated its "underperform" rating on the stock.