AMC Theatres Analysts Lower Estimates, Highlight Risks

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a closed AMC cinema

A couple of Wall Street observers, however, increased their stock price targets after the company's earnings report, with most now focusing on cinema reopenings and the future of AMC's debt load.

With exhibition giant AMC Theatres' first-quarter results in the books, Wall Street analysts on Wednesday dissected the figures and management commentary, with their main takeaway being caution.

"AMC remains a high risk story," MKM Partners analyst Eric Handler concluded in a report published early Wednesday, even though he also emphasized that "the company appears sufficiently capitalized to avoid bankruptcy in 2020." He lowered his 2020 and 2021 financial estimates "to reflect changes to our forecasted revenue for both the U.S. and European box office."

Eric Wold, analyst at B. Riley FBR, also cut his estimates and told investors: "We remain cautious on the company's outlook as well as that of the industry ahead of theater reopenings in the coming weeks." And Wedbush Securities' Michael Pachter argued: "The currently announced release slate appears overly optimistic, and we believe the probability of re-shuttering theaters and further release slate delays present real risks."

All three analysts maintained their "neutral" ratings on the stock, with Wold lifting his price target by $1 to $5 and Pachter raising it by $2 to $7.

The latest financial results came as the exhibition giant, controlled by China's Dalian Wanda Group, has faced Wall Street speculation it may not survive the novel coronavirus pandemic and resulting recession and may need to file for a Chapter 11 bankruptcy restructuring or address its high debt load to stay in business. It had recently said that "there were substantial doubts about its ability to continue operating as a going concern."

Pachter on Wednesday mentioned a debt exchange offer as a potential positive for AMC. "Though we have significant concerns about the exhibition industry, about AMC's solvency, and about the timing of its return to normalcy, AMC's recent move to lower its overall debt should be viewed as a positive signal," he wrote. The analyst also noted that his decision to raise his price target reflected "a lower debt balance assuming that AMC's debt exchange offer is successful."

He explained that, should all or most of the firm's bondholders accept the offer, it "will reduce AMC's debt by 20 percent while its quarterly interest expense would remain roughly $94 million." Said Pachter: "We think it is likely that all bondholders will swap, because the new bonds are superior in terms of liquidation preference." But he also cautioned: "AMC is threatened by insolvency should theater closures persist further into the year or if they are required to re-shutter after reopening, which we maintain is a possibility."

The movie theater chain said Tuesday that it would be "fully open globally in July." Its management team said on the earnings call that the company expected to screen Warner Bros.' Christopher Nolan film Tenet starting July 17, followed by Disney's Mulan from July 24.

"We are pleased to see trends moving in a positive direction, but remain extremely concerned about AMC's absolute level of debt and interest payments as well as its above average level of operating expenses given its major metropolitan footprint," Handler wrote in his report.

The analyst now projects revenue of $2.58 billion and an adjusted loss before interest, taxes, depreciation and amortization of $345 million for 2020. For 2021, he forecasts revenue of $5.27 billion and a swing to adjusted earnings before interest, taxes, depreciation and amortization of $485 million. "These estimates are based on box office declines of 55 percent to 60 percent in 2020, followed by a 105 percent to 110 percent recovery," Handler explained. "We had previously based our projections on a 45 percent decline in 2020 and an 85 percent recovery in 2021."

For 2020, he projects a 100 percent box office decline in the current second quarter due to the pandemic shutdowns, a 65 percent decline from the year-ago period in the third quarter and a 29 percent decline in the fourth quarter.

Wold lowered his revenue estimate for 2020 from $3.10 billion to $2.62 billion and his 2021 forecast from $5.21 billion to  $5.12 billion. He also cut his adjusted EBITDA projections from $67 million to a loss of $528 million for 2020 and from $707 million to $660 million for 2021. 

Analysts are now focusing their attention on the return of cinemas after the pandemic. Wold said he would concentrate on "how receptive consumers are to returning to theaters, how robust the film slate remains, and the level of impact from attendance restrictions."

Discussing AMC's steps to ensure consumer safety after reopening its venues, Handler said: "We found specific safety measures AMC plans to take for its reopening a bit lacking although more details will be provided later this month, possibly as early as next week. Management did note: It is closely working with various municipal governments to comply with required guidelines; it has been in contact with the Harvard School of Public Health to develop cleaning protocols; it has established a partnership with Clorox to ensure it has a proper supply of equipment; and it is enacting necessary digital technology to facilitate contactless ticketing and mobile ordering of concessions."

AMC Theatres, hit in mid-March by a shutdown of its circuit amid the pandemic, late Tuesday reported a quarterly loss of $2.17 billion, including $1.85 billion in one-time impairment charges, on sharply lower revenue.

AMC also addressed in its earnings report how it will address its showdown with Universal Pictures over the studio shifting Trolls World Tour to premium VOD amid the COVID-19 crisis and whether that will impact whether MGM's No Time to Die release in December plays on its international screens. "While we are in active dialogue with Universal, no movies made by Universal Studios are currently on our docket," AMC said.

During the analyst call, AMC CEO Adam Aron added: "Relations are warm with Universal. There's nothing personal with this issue with Universal. This is just an issue about money. … We'll see how it all shakes out."