AMC’s profits will skyrocket if he can keep up with GameStop with this move 1

0

AMC Entertainment (NYSE: AMC) and GameStop (NYSE: GME) have at least one thing in common: The shares of both companies have been caught in a buying spree this year that has led to their stock prices rising at least 950% in 2021.

The remarkable increase in the share price has created a situation where their ratings are separated from their operating performance. Even before the pandemic, companies struggled to increase their revenues and the economic bottlenecks associated with the pandemic were hurting their businesses even more.

With the price hike, the management of both companies saw an opportunity to raise funds by selling additional shares. GameStop used the funds raised to help eliminate long-term debt. If AMC could do the same, it would help its profits soar.

Image source: Getty Images.

This is not always the case when issuing more shares can help increase a company’s profits. However, AMC stock is up 2100% and GameStop stock is up over 956% in 2021 and both had costly debt on the balance sheet. This combination suggests that it would be prudent to issue shares to repay the debt. Cost savings resulting from lower interest payments are expected to offset the dilutive effect of more shares outstanding.

GameStop succeeded in eliminating long-term debt

In April, GameStop sold additional shares of its stock to the public and raised $ 550 million in revenue. This was enough to pay off what was left of the company’s long-term debt. Here’s how CEO George Sherman broke things down on the 2021 Q1 earnings conference call:

Overall debt levels compared to the first quarter of last year were reduced by $ 504 million and reflect the repayment of $ 202 million of senior notes due 2021, the voluntary prepayment of 216.4 million of 10% senior notes due 2023 and the $ 135 million repayment of the company’s revolving credit facility.

Interestingly, GameStop reported a net loss of $ 66.7 million in its most recent quarter and an interest charge of $ 24.9 million. With the elimination of all of its long-term debt, those interest charges should approach zero.

AMC has a bigger digging hole

Similar to GameStop, AMC has used its inflated stock price to increase equity. In the last quarter, she sold enough more shares to raise $ 1.2 billion. However, that number is nowhere near enough to pay off the $ 5 billion in short- and long-term debt on its balance sheet. The company has reached its authorized limit on the number of shares it can sell to raise funds. Management is trying to get shareholders to increase this limit so that it can raise the cash they need. Shareholders balked at the idea.

To make matters worse, AMC’s debt is a heavier burden than GameStop’s. In the first six months of fiscal 2021, AMC incurred interest expense of $ 239 million on revenue of $ 593 million. AMC’s most recent $ 100 million debt issue in January this year was at an interest rate of at least 15%. Overall, the company’s $ 1.9 billion in debt is at a reasonable rate of 3%, while the remainder of its collection costs over 10%.

In addition to interest expense, AMC should consider repayment of principal. It has to repay or refinance $ 580 million in 2023, $ 618 million in 2025 and $ 3.8 billion in 2026. Fortunately, management has raised the cash balance to $ 1.8 billion, but AMC is still generating negative liquidity.

If AMC shareholders can agree to let management issue more shares to eliminate the company’s long-term debt, it could again generate profits instead of paying hundreds of millions of dollars in payments. interest only to lenders. Failure to do so could spoil a golden opportunity for the company to pay off its high-interest debt. AMC has not made more than $ 310 million in operating profits over the past decade. Yet its interest charges are poised to eclipse that total this year and stay higher until the company pays them off or refinances the debt.

For these reasons, it could be a major boost to the company’s earning potential for shareholders to allow for an additional share sale.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


Source link

Leave A Reply

Your email address will not be published.