AMC Entertainment Stock Down 17% in January – Time to Buy AMC Stock?

AMC stock has started the year with the wrong foot as it has declined more than 17% so far following some remarks from its Chief Executive Officer in regards to the firm’s plans to strengthen its balance sheet this year.

In a tweet published on 3 January, Adam Aron – AMC’s CEO – stated: “MY NEW YEAR’S RESOLUTION FOR AMC. In 2020 and early 2021, AMC took on debt at high interest rates to survive. If we can, in 2022 I’d like to refinance some of our debt to reduce our interest expense, push out some debt maturities by several years and loosen covenants”.

He added: “WITH AN IMPROVING FINANCIAL POSITION, one of our 2022 goals is to strengthen our balance sheet. There is no guarantee of success, but we will try very hard to get this done. We are always thinking of creative ways to make AMC’s future more secure.”

Moreover, the CEO commented about the potential acceptance of Dogecoin and Shiba Inu – two meme cryptocurrencies – as mean of payment for buying tickets and other items from AMC.

In this regard, he stated that the company is “well on track for the promised Q1 implementation”.

The market seems to have responded negatively to the tone of his comments, especially those made about the firm’s financial stability and outlook.

Moreover, the rapid surge of COVID-19 cases in the United States amid the spread of the omicron variant is also concerning for market participants as it could lead to prolonged restrictions.

Social distancing protocols keep cinemas from operating at full capacity. Therefore, a prolonged outbreak of omicron in the United States and other corners of the developed world may continue to affect AMC’s revenue-generation capacity – possibly for longer than initially expected.

What could be expected from this meme stock in 2022? In this article, I’ll be assessing the price action and fundamentals of AMC stock to outline plausible scenarios for the future.

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AMC Entertainment Stock – Technical Analysis

Back in December when I last wrote about AMC Entertainment, I highlighted that a break below the $29 support area following a rejection of the 200-day simple moving average was quite concerning and justified a bearish outlook.

Even though the stock went on to surge on the days that followed, another rejection of the 200-day SMA is still favoring a bearish mid-term outlook for AMC stock and even more so now if one considers the negative impact of a rapid spread of omicron in the United States.

In this regard, the number of daily virus cases in the country has spiked to the highest level on record at 750,000 reported cases in a single day.

Even though authorities have not reintroduced the kind of restrictions seen in 2020 and early 2021, it is plausible to expect that such a surge will have some sort of impact on attendance levels for AMC Entertainment (AMC).

From a technical perspective, the price is tagging a horizontal support from 14 December – the day on which I published my latest piece on AMC – and this makes the next stock trading sessions quite crucial for the faith of this stock as a break below could trigger an important decline

Momentum indicators are still favoring a bearish outlook as the Relative Strength Index (RSI) stands at 31 and has failed to climb above 50 on two occasions already. Moreover, the MACD just crossed below the signal line and continues to be in negative territory.

Moreover, the 50-day simple moving average just crossed below the 200-day SMA – a bearish setup called a death cross.

All things considered, the outlook remains bearish and the downside risk remains huge, as I stated back in December, with a potential decline toward the low 10s remaining a plausible scenario for AMC stock.

AMC Entertainment Stock – Fundamental Analysis

Even though there have been some box-office hits lately such as “Spider-man: No Way Home” the movie theater chain is still quite far from recovering from the hit it took amid the pandemic.

In this regard, sales in the past 12 months stood at $1.33 billion – a figure that is still 74% below pre-pandemic levels – while GAAP operating losses landed at $1.34 billion.

Additionally, AMC spent a total of $411 million in interest payments during this period or $111 million more than the amount it disbursed for this concept the year before the health crisis.

According to the company’s latest quarterly report, cash and equivalents stood at $1.61 billion while the firm’s long-term debt and capital leases combined were $10.7 billion. Total assets ended the period at $11 billion. As for its cash flows, in the past quarter alone, AMC burned approximately $200 million.

A total of $43 million in capital leases were due in December 2021 while another $140 million are due in 2022. Meanwhile, only $20 million of the company’s long-term debt principal is due in 2022.

All things considered, AMC seems to have enough cash to survive this year. However, solvency risks remain elevated as there are some important covenants and clauses that could trigger the early repayment of some of the firm’s debt.

In this regard, the latest quarterly report revealed that AMC must maintain a minimum liquidity of $144 million to comply with those covenants.

At its current valuation of $11.5 billion, the firm is being valued at 4.6 times its forecasted sales for this year. Meanwhile, the market is expecting that AMC’s revenues will be able to climb near pre-pandemic levels by 2023.

Any developments that threaten to derail these scenarios such as the reintroduction of severe restrictions that prevent the company from operating its theaters or the appearance of more variants that threaten to prolong the pandemic for longer than expected could lead to a swift decline in the valuation of the company.

All things considered, the current valuation remains stretched and irrational based on the company’s elevated solvency risk and deteriorated fundamentals.

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