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Top Gun: Maverick was released this weekend to rave reviews and a box office bonanza. I saw the film over the weekend and thought it was fantastic. Popular meme stock AMC Entertainment (AMC) surged at the open in response. But will Top Gun save AMC? I doubt it. Let’s dive in for why.
Can Top Gun Save AMC?
First, you should know that AMC is in a lot of trouble financially and that the picture is far worse than the share price implies. The balance sheet makes AMC’s distress relatively clear, as AMC has about $10.3 billion in assets but $12.5 billion in liabilities. This is even worse than it looks because much of their assets are illiquid, while their liabilities are rock solid and owed in cash.
Top Gun’s reincarnation is a bit of a rarity in contemporary Hollywood, which heavily favors superhero flicks and comic book movies. Movie studios have shifted their focus in large part to the Chinese market, which is their bread and butter. Meanwhile, Top Gun features Maverick wearing a jacket with a Taiwanese flag on it – so it’s likely China won’t even show this movie. Paramount (PARA) may have a strategy here – with so many studios bowing to what some perceive as “woke” corporate interests and the Chinese Communist Party, they might find profitability in projects that appeal to a broad swath of American society, but that other studios like Disney (DIS) won’t touch.
As successful as the Top Gun remake is, my data only has it as the 39th most successful opening of all time with about $156 million in sales domestically. For reference, the Spider-Man movie did $260 million in its opening weekend last winter, and AMC still lost money for the quarter.
Ballparking the gross profit for AMC, I estimate from their 10-K filing that they have about 40% market share in the US, so let’s say AMC sold $62.4 million in tickets. I don’t know the specific deal AMC has with Paramount, but I’ll assume it’s 50/50 to be very generous. That gets AMC about $31.2 million off of Top Gun domestically, and maybe an equal amount abroad.
For reference, AMC’s losses for the last 12 months total roughly $1.04 billion, with interest on their debt alone accounting for about a third of the total. AMC lost about $5.9 billion during COVID, which they covered by issuing debt, selling shares to meme-hungry investors, and getting rent concessions on theatres. They’d need about 100 movies as successful as Top Gun to climb out of the hole they’re in, and for many households, Top Gun is the only movie they’ll see this summer.
These factors add up to why despite getting a ton of enthusiasm from the public, AMC Entertainment is not likely to be able to stay in business indefinitely. However, the company does have enough cash to last until next spring, as per management’s 10-K filing.
We believe our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund our operations, satisfy our obligations, including cash outflows for increased rent and planned capital expenditures, and comply with minimum liquidity and financial covenant requirements under our debt covenants related to borrowings pursuant to the Senior Secured revolving Credit Facility and Odeon Term Loan Facility for at least the next twelve months.
For a more market-based approach, you can look at the prices that traders are willing to pay for AMC bonds, which are rated CCC by rating agencies and have already selectively defaulted once.
AMC’s secured debt pays interest of about 8% annually, but its unsecured debt pays interest of over 20%. Long story short – AMC is likely to run out of money sometime in 2023, and the creditors will take control of the company. There’s some chance of a miracle here, but with both the debt and equity markets cooling their enthusiasm for meme stocks and businesses that lose lots of money, I don’t see a way out. I don’t have a position in AMC stock or options, but I believe shareholders need to be honest about the company’s financial prospects.
Bottom Line
Are you bullish on the movie industry? AMC is probably not the way to play it. AMC is saddled with billions of dollars in leases on unprofitable theatres and billions more in junk-rated debt carrying high-interest rates. AMC’s creditors are highly likely to take control of the company and either restructure it or liquidate it. As such, my 12-month price target for AMC is roughly $0.
If you want a play on the movie industry, consider buying Paramount stock. Instead of junk-rated debt, their credit is investment grade, and instead of losing money, they make money. Plus you’ll get a dividend.
AMC’s business model since COVID has not been selling movie tickets to moviegoers. For better or worse, AMC’s business model has been selling stock to speculators. And without the flow of stimulus checks, the wild speculation that happened in meme stocks that allowed companies to sell billions in stock in secondary offerings is not going to happen. You’re better off spending your money seeing the Top Gun sequel than throwing good money after bad on the stock.
