There is a lot of buzz surrounding AMC (NYSE:AMC) stock, especially among investors who gather on Reddit to discuss stocks. They encourage each other to hold the stock as it rises and buy more shares when it falls, and their plan appears to be to collectively buy and hold the stock until it reaches astronomical levels. A target of $500,000 is often touted on social media sites. As of this writing, AMC’s stock price is $46.19.
The company is generating more interest recently due to a decision made by CEO Adam Aron to shelve a shareholder vote that would have authorized more shares for sale. A positive vote could have given management the ability to pay down a big chunk of its stifling debt.
Little shareholder interest in fundamental company improvement
Before withdrawing the proposal, management requested authorization to sell 25 million shares of AMC stock. Depending on the appetite from retail investors for the newly minted shares, it could have raised upwards of a billion dollars in cash. To put that figure into context, AMC has $5.46 billion in debt on its balance sheet.
The debt is placing a heavy burden on AMC. In its most recent quarter, the company paid an interest expense of $151.5 million. AMC’s total net loss in the quarter was $567 million. Although the interest expense was not solely to blame for its loss, it certainly played a part. Annualized, the interest expense would reach $600 million.
Over the last decade, the highest operating income AMC was able to earn was $310 million in 2018. The elevated interest expense could mean that AMC will operate at a loss even if it returns to attendance levels achieved before the pandemic. If debt levels remain elevated, AMC would have to double its best operating performance in the last decade to break even on its interest expense. It’s a tall order to be sure.
A missed opportunity
CEO Adam Aron likely shelved the plan after getting negative feedback. Voting started June 16 and was set to end on July 28. When announcing the withdrawal of the plan, the CEO reiterated his firm belief that a share sale would be positive for the company’s long-term prospects.
Why would existing shareholders be against issuing new shares if it’s in the company’s best interest? The additional supply of stock could temporarily cause the price of shares to fall. Over 4 million people own shares of AMC stock, with an average holding of 120 shares each.
The message some shareholders are sending to management appears to be that they are not concerned about the long-term prospects of AMC. They may be more interested in boosting the share price in the short term. And that sentiment decreases the probability that management will raise cash through new equity sales and pay down debt. That would be an unfortunate outcome and a missed opportunity for shareholders to put the company on a stable long-term footing.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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