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AMC Entertainment (NYSE:AMC) is chipping away at its debt – but it’s still overpriced, Wedbush says, reiterating an Underperform rating while still finding a pair trade possibility with AMC’s preferred units.
AMC stock (AMC) is up 7.3%, joining in a marketwide rebound day and on pace for its first gain in more than a week (it last finished positive on Dec. 21 before four straight down trading days).
Those declines came after a key catalyst in AMC proposing a debt-for-equity swap involving its AMC Preferred Equity units ((APE), also up 8.6% Thursday).
The movie-theater business is still on a path to normalization and AMC has the cash to keep operating in that improving environment in the coming year, analysts Alicia Reese and Michael Pachter said.
“However, AMC is still grappling with its massive debt balance, while it seeks ways to bolster confidence among its retail shareholders by way of new business ventures and screen acquisitions,” they wrote.
The key upshot of AMC’s recent activity is that after an HSR review and at least the first two shareholder proposals have pased, “AMC’s 2023 financials will look similar to its financials in 2019,” they said. Revenue will track similarly, while EBITDA margin lags due to newer macro pressures.
“All else equal, investors would expect AMC’s share price to be lower in 2023 than 2019,” they said. “Yet at the closing price of AMC and APE on December 28, and assuming an APE share conversion and reverse stock-split, shares should trade at $52.90, a 711% premium to AMC’s share price at January 1, 2020.”
The firm reiterated a price target of $2 (at the current share count), implying 51% downside. Assuming the APE conversion and reverse split would push its price target to $40 vs. a likely trading price of $52.90, and “If we compare this to January 1, 2020, where the share count was similar and net debt was $450 million less, it becomes even clearer how overpriced shares of AMC are at current levels.”
All of that said, AMC clearly has a cohort of retail investors that are “steadfast” who will likely “prop up shares for a while longer.”
As for the implications of converting the APE units to AMC shares: “However, as APE shares (APE) are trading under $2 per share and should trade in line with shares of AMC (AMC), we would recommend a pair trade.”
AMC’s recent declines led CEO Adam Aron to propose freezing pay increases for himself and other executives, and the exchange plan led S&P to downgrade its long-term credit, calling the move “tantamount to default.”
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