AMC shares have recently dropped nearly 70% from their most recent high of $7.02. I’ve been looking at AMC for a while now, waiting for the perfect time to purchase the stock. In my opinion, the time has come to purchase the stock, but I’d hold off a little longer on the options. Be aware that this is definitely a speculative play, but I think there is likely a 300% or more potential return in the next year or so
The Bad News
- The company has somewhere around 6 months of cash on hand, and they will almost certainly need additional cash (but I think they’ll be able to raise it)
- AMC’s revenues are down 90.9% as of the Q3 2020.
- The company has stated that without additional capital raises that it as “substantial doubts” about continuing as a going concern — I’ll state it again that investing in AMC is very speculative at this point.
- The company plans to further dilute shareholders beyond the 30%+ in September and October.
So clearly there are a lot of headwinds for the stock, but each one has a single cause: the pandemic. The way I see it, if the virus begins to become a non-issue, AMC and its share price stand to benefit greatly.
The next question, naturally, is when will that happen?
Looking back at the swine flu, it took about a year from WHO’s declaration of the swine flu as a pandemic before it was abated. It also took about two months to fully distribute the vaccine throughout the US.
Based on what Dr. Fauci has previously said, I think we’ll have a vaccine around March 2021 conservatively. Therefore, if we assume that the timeline for the swine flu is similar for Covid, the vaccine should be distributed by around June 2021. From there, I expect Q3 and Q4 2020 will be record quarters for AMC.
The Good News
- They’ve negotiated rent abatements with landlords and debt covenant holidays with creditors until March of next year.
- The company sold 9 theaters in Q3 2020 for over 70M USD and will likely consider additional sales to bolster liquidity
- The company believes the major difficulty right now is the lack of new movies to drive traffic to theaters rather than the willingness of people to go to movie theaters because of virus concerns.
- AMC only needs 25% capacity to break-even, and they already sit at 10–15% today.
- AMC has reopened 78% of domestic theaters and over 90% of international theaters as of Sept. 30.
Given that creditors and landlords have already given AMC these concessions, I think AMC will definitely be able to negotiate additional concessions as long as there is strong progress on a vaccine. I have the same conclusion when it comes to the likelihood that AMC is able to raise additional capital, and I think they’ll probably be able to get that done in the next two months.
What’s even better is that AMC only needs to reach 25% capacity to break even, and that assumes the company is paying rent. If the company is able to reach even that point, and it’s halfway there already, I think the stock price will reach upwards of $5 per share.
Options Play?
If you’re thinking about call options on AMC, I’m personally thinking about the January 2023 $4.5, $5, $7, and $10 strike price. I wouldn’t purchase it until near the end of December since I don’t think there will be a strong catalyst until then (unless Wall Street gets hyped up on stimulus talks), and you don’t want to purchase theta that you don’t have to.
I do think that the Jan. 2022 calls could be good, but, of course, there more risky. Like I said, I don’t think AMC will start putting up strong numbers until the latter half of 2021 and by that time, a lot of the theta value will be lost on those calls.
In either case, I would definitely own shares of AMC today given that the price is so cheap and buy more if it continues to go down. That way, you can still pick up some of the upside if there is a big spike between now and January.
Disclaimer: Please be aware that I do own shares of AMC common stock and plan to add to my position in the near-term.
