2 reasons to sell AMC Entertainment

Down 31% to $18 since the start of the year, the AMC Entertainment (NYSE: AMC) the bubble finally deflates. But the pain may have only just begun. The company’s finances continue to struggle and management makes questionable decisions with shareholder capital. Let’s dig deeper.

1. Management could lose touch

Led by CEO Adam Aron, AMC Entertainment has navigated the coronavirus pandemic, which has devastated its operations amid lockdowns and movie release delays in 2020 and 2021. The company has also embraced the meme-shopping community that flocked to its stock accepting volatile assets like Dogecoin and shiba inus as payment. But now management seems to have gone too far.

Image source: Getty Images.

In March, the company bought a 22% stake in a near-bankrupt gold mining company Hydroft Mining for $27.9 million. According to Aron, Hycroft is in a similar position to where AMC was during its crisis, enjoying strong assets despite liquidity issues. Management suggests this deal could be the first of many future investments in troubled assets. But that could be bad news for AMC shareholders.

AMC speculates in industries that have nothing to do with its expertise in operating movie theaters. So it’s unclear how much help he’ll be able to provide to these companies (apart from a fashionable boost to their stock prices). And while management may believe they avoided bankruptcy because of their skills, it arguably has more to do with the meme stock movement this boosted the company’s share price and gave it leeway to dilute investors for much-needed capital.

2. AMC’s finances are still fragile

AMC’s new strategy is risky, especially given its weak balance sheet. Although fourth-quarter revenue rebounded from $162.5 million to $1.2 billion year-over-year, it owes $5.4 billion in business borrowings, down from just 1, $6 billion in cash and cash equivalents. And the company is not yet profitable, recording a net loss of $134 million during the period.

With pressing challenges in AMC’s core business, it seems reckless for the company to use its much-needed cash to invest in inherently risky near-bankrupt companies. Investors could pay the price by continuing equity dilutionwhich has already ravaged the company in recent years.

AMC’s average number of shares outstanding has climbed 237% to around 514 million between 2020 and 2021. And the dilution could continue if the company needs to raise capital to fund more investment. Equity dilution can harm investors by reducing their ownership of the business and their right to its profits, especially if the new capital is not used to create value.

A holding company even?

Inspired by its narrow escape from bankruptcy, AMC could be turning into a holding company that invests in troubled stocks in addition to its movie business. This strategy seems risky given AMC’s weak balance sheet and lack of expertise in areas other than theaters. Investors could face significant stock dilution as management turns to this dubious new strategy.

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Will Ebiefung has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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