“Bubbles tend to topple under their own weight. Everybody is in. The last short has covered. The last buyer has bought (or bought massive amounts of weekly calls). The decline starts and the psychology shifts from greed to complacency to worry to panic.” – David Einhorn
When you buy a share of stock, what do you actually get in return? According to The Stupid Way™ of analyzing stocks, a form of fundamental analysis practiced by an ever-dwindling number of Money Haters™, when you buy a share of stock you gain an ownership claim on the assets and future earnings of the underlying company.
Using that framework, what should a share of stock be worth? Well, it should depend on four things: the current value of the company’s assets, how profitable the company will be in the future, what percentage of the shares outstanding your stock ownership represents, and the amount and relative seniority of any other competing claims against the assets and future earnings of the underlying company. These other competing claims could include liens, loans, bond debt, and so on. All other things being equal between two companies, a share of stock should be worth more for the company that has a more valuable asset base, brighter future prospects for profit, fewer total shares outstanding, and less debt.
Silly, I know. But bear with me a bit more. There’s even a formal mechanism for keeping track of the seniority of claims against a company’s assets and future earnings called the capital table. At the top of the capital table sits the most senior claim – usually a bank revolver (i.e., revolving line of credit). Below that sits secured debt (i.e., debt secured by specific assets of the company called out and held separate from other claimants), followed by unsecured debt, and finally equity (and by equity, I mean that stock thingy you bought on Robinhood).
That’s right – stocks are last in line to collect. Why even bother to buy them? Simple. The claims sitting above equity are usually fixed. If a company does well enough to pay back (or easily refinance) those claims, the equity holders enjoy the rest of the upside. If the company succeeds wildly, the top of the capital table gets its principal back with interest, but equity holders enjoy uncapped gains. It’s a simple risk/reward proposition.
The capital table becomes critically important when things go wrong. Can’t meet that interest payment coming due? Can’t refinance that bond? Well, let’s go to court and work things out. When a company files for bankruptcy protection, that usually means the company is seeking the supervision of a judge to reorganize its business and its capital table, to emerge from bankruptcy as a going concern, and to persist as a business with a second chance at succeeding. Often, the equity in the resulting new company (NewCo) goes to the bond holders of the old company (OldCo), leaving the shareholders (and even some unsecured bondholders) of OldCo with nothing.
If the company can’t create a sustainable business plan (i.e., prove it can be a going concern), the company’s assets will be sold off and the proceeds distributed to the claimants in order of seniority. Starting from the top, each entry in the capital table is made whole before the next entry sees a penny. Rarely do equity holders recover much in this scenario either. It’s a hard stonk life.
With that irrelevant nonsense out of the way, let me tell you what you really get when you buy a stock these days: the right to sell it to another sucker (hopefully). And no stock better represents this phenomenon than AMC Entertainment Holdings – the world’s largest movie theater chain. When the full history of the Super Stonks! era is written, what has transpired with AMC’s stock will certainly be a key chapter and I suspect the behavior of Adam Aron – the company’s CEO – won’t be looked upon too favorably. More on him later.
To get the full picture of what’s currently transpiring with AMC, let’s turn back the clock to December 31, 2019 and get a sense of the pre-Covid “was state” for the company. One of the things Money Haters like to do is – gasp! – read company filings. I began by pulling up the company’s annual report for 2019 (around the chicken coop we call annual reports “10Ks”). Perusing the document, one gets the sense AMC was a business in real trouble.
The company reported a net loss of $150 million for the year on flat revenue. It’s current assets (things like cash and receivables) were only $671 million, versus current liabilities (bills the company needed to pay off in the next 12 months) of $1.93 billion. The current ratio – current assets divided by current liabilities – is a standard measure of a company’s solvency. For good companies, a ratio in the range of 1.5-3 is considered acceptable. Slipping below 1 is a sign of danger. AMC’s current ratio was a deeply worrying 0.35, down from 0.59 at the end of 2018.
Worse still, the company’s capital table was a mess. I took a screenshot of the debt the company owed at that point (for simplicity, I’m ignoring the company’s various lease obligations). AMC had a staggering $4.9 billion in hard debt outstanding – much of which was trading at distressed levels (i.e., well below par).
AMC ended 2019 with 104 million shares of common stock outstanding. The stock was trading around $7.20 a share, down ~40% on the year, for a market cap of roughly $750 million. Compared to its towering obligations, AMC’s equity value was de minimis and shrinking fast. The company was dying a slow death, which makes intuitive sense given the state of the movie industry. The explosive growth of streaming had to come at the expense of somebody, and movie theater operators were feeling the brunt of it.
And then Covid-19 hit.
Two things are undoubtedly true about Covid-19 and AMC: it totally crushed the business and it wasn’t management’s fault. But hey, that’s why it’s called risk capital – sometimes, bad stuff happens to you that’s beyond your control. The government made tough and seemingly random decisions about which industries to support (i.e., airlines) and which industries to let fend for themselves (i.e., theaters). AMC was mostly already kinda insolvent to begin with, but Covid was a death blow. Or at least it should have been.
Just how bad was the blow? As bad as it could get. I went over to Box Office Mojo and downloaded the weekly US box office totals. In the chart below, you can see where the patient’s heart stopped beating. No business – especially a high fixed-cost business like operating a theater – can survive zero revenue indefinitely.
By all historical precedent of prudent management, Adam Aron should have sought bankruptcy protection for his company soon after Covid hit. He could have wiped out most of AMC’s debt, handed the equity of NewCo to the top of the capital table, renegotiated rent, eliminated certain supplier payments, and so on, thus positioning AMC to survive in the post-Covid world. It’s called bankruptcy protection for a reason. He could have ridden out the pandemic under court supervision and nobody would have batted an eye. Well, the sophisticated debt investors in his capital table wouldn’t have liked it, but sophisticated investors are supposed to take the occasional loss, aren’t they?
Aron didn’t do that. He fought. He issued stock whenever he could. He renegotiated debt. He borrowed more. He postponed paying rent. He laid off workers. He begged the government for assistance. He pleaded with state governors to ease pandemic restrictions. He fought with studios to prevent direct-to-streaming releases of blockbuster films. He was a regular on CNBC, pumping his stock at every opportunity. He spun all the plates he could spin. But by January of 2021, AMC’s stock had faded to below $2 a share and its lowest seniority bonds were trading hands at six cents (for those unfamiliar with debt markets, six cents isn’t very good). The end was nigh.
And then a miracle happened.
AMC became a Reddit Meme Super Stonk! In many ways, the Reddit-induced mania around AMC is even more absurd than what happened with GameStop. No need to repeat the full history here, but AMC exploded in popularity on Reddit, the apes bought stock and call options hand-over-fist, and AMC’s shares soared to unimaginable heights. Only weeks after dipping below $2 a share, AMC skyrocketed to $65 a share, and one person was simultaneously egging on the crowd as much as possible while selling as many freshly printed stock certificates as he could: Adam Aron. One mustn’t let a good miracle go to waste, after all.
Look, there’s an argument to be made that Aron exemplified what a good CEO should do in service of his many fiduciaries. I’m not here to make that argument. Nobody comes to Doomberg for such things. Instead, I think Aron is participating in a shameful scheme to fleece retail investors for the benefit of himself and the monied investors in his capital table. It’s a shitcoin rug pull, but on a multibillion-dollar scale. I think AMC is still a dying business destined to file for bankruptcy. The numbers don’t lie, they’ll just take a little while longer to reassert themselves because of these games. Let’s explore.
First, how is AMC’s business doing now that the economy is starting to reopen? Forget about the delta variant for now – that’s merely further downside risk to this analysis. How did the box office look for the first half of 2021? In a word, terrible. I added the 2021 year-to-date box office data to the chart shown below. The business model is broken. Nobody is going to theaters anymore. The hysteresis effect of Covid on the movie theater business is pronounced. Disney+ blasted through 100 million subscribers in May of 2021 and reported just yesterday that they had surpassed 116 million subscribers as of July 3, 2021 – growth that hungrily eats into tickets sales for AMC.
Second, just how many shares has Aron issued to the frenzied mob? As much as he could. Literally. He cranked the shareholder printing press until his arm fell off. More specifically, he sold every share possible until the existing shareholders insisted he stop. Don’t believe me? Check this chart out:
Third, is the capital table any cleaner now that Aron has raked in all this money from the meme mob? Of course not. That money is sitting as cash on AMC’s balance sheet, which Aron is busily burning through at a dizzying pace. AMC published its quarterly results earlier this week and, being the Money Hater that I am, I pulled up the SEC filing for the quarter ended June 30, 2021 (around the chicken coop we call quarterly reports “10Qs”). Here’s a look at the updated capital table:
AMC owes more debt now than it did pre-Covid. Some debt has been paid off, other debts have appeared or have been renegotiated with firmer terms, riches have been won and lost by sophisticated debt investors – but AMC is still straddled with a mountain of obligations it can’t ever pay back. Retail money, on a truly unprecedented scale, has been tossed into the furnace in a futile attempt to postpone the inevitable.
Fourth, just how much runway has Aron bought himself? Looking over the data in the 10Q, AMC had $1.81 billion of cash as of June 30 but burned through $547 million in cash flow from operations in the past six months. The company had revenue of just $445 million and posted a net loss of $344 million, a cool -77% net margin. Finger in the wind – Aron has three quarters left at best, at which point he will either be forced to issue another few hundred million shares or seek the protection of the courts, thereby pulling the rug from the mob.
Fifth, how is the stock doing during all of this? Funny you should ask. Remember back at the end of 2019 when AMC closed the year at $7.20 a share? Remember the framework we discussed at the beginning of this article? It is irrefutable that AMC’s assets are less valuable than they were before Covid, its prospects for future profits are almost certainly permanently impaired, there are five times as many shares outstanding, and there is more debt in the capital table on worse terms. And yet, the stock closed yesterday at $33 a share. Correcting for share count alone, AMC’s current stock price is the equivalent of $165 a share on a pre-Covid basis. This is the ultimate Super Stonk!
Why am I being so hard on Adam Aron? Run this experiment yourself. Google “AMC $100,000.” There’s an army of unsophisticated retail investors, wagering money it can’t afford to lose, that honestly believes AMC’s stock is going to $100,000 or even $500,000 a share. They have convinced themselves that evil hedge funds and suspicious dark pool trading are responsible for AMC’s recent disappointing stock moves. Just to benchmark you, $100,000 a share for AMC would represent a market cap of $51 trillion, or two-and-a-half times the entire US gross domestic product. During the Q2 earnings call earlier this week, Aron made the transparent and superfluous announcement that all AMC theaters will have the technological capability to accept bitcoin by the end of the year. Of course he did. In doing so, he revealed for all to see the true nature of his character and the real game he is playing.
There comes a time when the movie is so bad you have to stand up and walk out of the theater. This is one of those times for me. AMC is a zero, and shame on Adam Aron.
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