Monday was an excellent start to the week for AMC Entertainment (NYSE:AMC), with AMC stock during over 8% because of strong weekend box office sales.
Fans of Despicable Me lined up for its fourth sequel, driving $230 million in gross box office sales worldwide and $122 million in the U.S. This success saw both ticket and merchandise sales at AMC theaters surge over the previous year.
In the past weeks, AMC has been quite volatile. Currently, the company has a $1.6 billion market cap, and AMC stock is trading around $5.50 per share. The question many investors have is whether this recent uptick is sustainable, or if the company’s longer-term downtrend will continue.
Let’s dive into some positives first, before assessing whether this stock’s underlying fundamental issues are too big of a concern.
Holiday Boost for Theater Stocks
Shares of AMC stock rose substantially after the company reported a significant holiday boost. Cinemark (NYSE:CNK) stock was upgraded by B. Riley analyst Eric Wold, who raised his price target to $27.
Wold cited potential market share gains and a 2025 box office rebound as reasons for this upgrade. AMC’s strong July 4 traffic from Despicable Me 4 was the notable driver behind this stock’s recent increase.
Despite industry weaknesses, Wold anticipates further upside for Cinemark, with the company emphasizing premium experiences as the industry recovers.
B. Riley reported that Q2 2024 domestic box office revenue missed expectations, totaling $1.95 billion, a 27% year-over-year drop and below the $2.35 billion forecast. This number also notably amounted to roughly 60% of Q2 2019 levels.
Recent releases have underperformed, leading B. Riley to lower its 2024 box office projection to $8.2 billion from $8.5 billion. Despite optimism for a 2025 rebound due to a strong movie lineup, the analyst’s 2025 estimate was also reduced to $9.7 billion from $9.9 billion.
The Bear Case
AMC focused on improving its balance sheet, but has faced investor disapproval over plans for a debt reduction via equity swap. Bloomberg reported on June 24 about talks with lenders to reduce debt and extend bond maturities, causing a slight stock rise.
AMC aims to swap some debt for equity, diluting shareholders. Optimists see potential cash flow improvement, but current foot traffic and revenue metrics suggest interest payments will still burden free cash flow.
Significant and widespread actions are needed for a substantial impact to be seen in the company’s balance sheet.
Investors should be cautious about AMC’s outlook. By Q1 2024, AMC cut long-term debt to $8.99 billion, but $4.42 billion in lease payments through 2029 remains a burden. Despite recent positive debt reduction measures taken, lease payments strain cash flow, risking covenant violations.
AMC Stock Still Looks Shaky
AMC’s growth metrics are mixed. The company’s growth outlook remains uncertain, despite strong recent box office showings.
Investors will likely need to see sustained positive results on this front, with future quarterly losses also required to narrow in order for many to step into this stock.
AMC is a company that’s been moving in the right direction, driven in part by higher spending on experiences from consumers following the pandemic.
That said, there are long-term structural headwinds the company continues to battle, with high growth in streaming and home entertainment options taking away from the company’s previous luster.
I think AMC stock remains one investors may be best avoiding right now. The company’s troubled balance sheet and its fundamental risk overshadows any sort of positive news in terms of box office headlines. For now, I think the safest thing to do is to move on to companies with far better growth prospects in this current market.
On the date of publication, Chris MacDonald did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.