Nowadays, AMC Entertainment Holdings (NYSE: AMC) is known more for being a meme stock than any of its other attributes. Retailers who post or read posts on Reddit trading forums appear to have chosen to buy and hold the stock to counter hedge funds betting that AMC’s share price would fall in a move commonly known as a short squeeze referred to as. The Reddit audience is winning the battle so far. AMC’s share price is up around 2,450% since the start of the year.
AMC’s management was wise to seize this pricing opportunity and sell new shares at the increased prices to raise the much-needed funds. This had already helped him get through the most acute phase of the pandemic when all of his theaters were closed to spectators and the company blew cash to death. It plans to use some of the new funds to pay off the debt it accumulated during the pandemic.
But this battle between Reddit merchants and hedge funds presents AMC with yet another opportunity – to raise enough cash to grow profits over the long term.
AMC’s share price rose over 2,000% in 2021. Image source: Getty Images.
Uncomfortable posture
AMC’s management has already moved closer to the maximum number of shares it is allowed to sell to raise equity. If it wants to sell new shares, it must get shareholder approval. This is exactly what the management is striving for. At this year’s Annual General Meeting, among other things, an authorization to sell 25 million shares was proposed. At today’s closing price of $ 54.06, the sale of 25 million shares of AMC could raise $ 1.35 billion.
Debt was a problem for AMC even before the pandemic. The interest expense temporarily exceeded the operating income. Debt could be an even bigger burden as the company borrowed at higher interest rates during the pandemic. AMC recorded an interest expense of $ 150 million for the last quarter. Extrapolated to the year, that would be 600 million US dollars and more than double the interest expense of 292.8 million US dollars in 2019.
To put that number in context, AMC’s operating income for 2019, 2018, and 2017 was $ 136 million, $ 265 million, and $ 102 million, respectively.
Image source: Getty Images.
What that could mean for shareholders
If AMC’s shareholders vote to approve the further sale of its shares, and if management then uses the money to repay high-yield debt, it could significantly improve AMC’s earnings potential. As of March 31, AMC had $ 5.4 billion in debt. The estimated cash from the stock sale of 25 million shares could repay 25% of the debt, potentially reducing interest expense below pre-pandemic levels.
Additionally, if retailers maintain their enthusiasm for helping AMC, they could vote for even more stock sales, which could be enough to repay all of the company’s $ 5.4 billion in debt. That would take AMC’s biggest thorn in its side, as the interest expenses almost exceed their rental costs. The difference is that theaters, which enable the company to generate a profit, pay rent, while AMC does not require debt to provide service to customers.
In doing so, AMC shareholders have the opportunity to fundamentally improve the company’s long-term financial health and earnings prospects. It remains to be seen whether investors will choose to do this. The last day of voting is July 28th, the annual general meeting is scheduled for July 29th.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.
source https://dailyhealthynews.ca/this-scenario-could-cause-amcs-earnings-to-jump-sustainably/
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