AMC Entertainment (AMC -6.58%), one of the largest cinema operators in the world, has been hit hard by the coronavirus pandemic. It is still struggling, losing $0.20 per share in the second quarter of 2022 despite significantly improved footfall and revenue.
This helps explain why AMC might want to raise additional funds. But how that process unfolds should be a big deal for investors, as the company adds to a list of stocks that don’t look particularly shareholder-friendly.
Priority to shareholders
The basic logic of investing is that shareholders own the company. They hire a board of directors to oversee the management of the company; the board hires a CEO to manage the day-to-day management of the company. This CEO answers to the board of directors, who answers to the shareholders. Overall, the business is meant to be run for the benefit of its owners – the people and institutions that own the shares.
This is a simplification of what complex entities are. There are clearly other parties involved that need to be considered, such as employees, customers, and the cities where companies operate. However, good companies understand that taking care of these constituencies also benefits shareholders. Unfortunately, not all businesses operate in the best interests of their owners.
Right now, AMC Entertainment shareholders should be concerned about the company’s actions.
A list of problems at AMC
When the pandemic hit in 2020, movie theaters were all but forced to close. It was a brutal time, and AMC’s financial performance was understandably terrible. Then he kind of got sucked into the stock meme hype, skyrocketing his stock based on emotion, not financial performance. Super aggressive investors chatting on message boards were able to move the stock in an often volatile way.
Management used the high stock price to issue shares; who provided the cinema chain with much-needed cash to help it get by during the pandemic. The survival of the company clearly outweighed the dilution that shareholders suffered as a result of the stock sales. Indeed, the stock would probably have been worthless if the company had gone bankrupt.
But something interesting happened in July 2021. AMC had applied for approval to increase its number of shares so that it could issue even more shares. He withdrew the proposal because it was, presumably, rejected by shareholders. Essentially, the company’s owners said no, noting that adding additional shares would dilute existing shareholders even more than they already had. Although shareholders managed to protect themselves, it was an important sign that management may not have its best interests in mind.
And then in March 2022, AMC bought a 22% stake in Hycroft Mining (HYMC -0.81%). Hycroft is a tiny gold digger, in a business that has absolutely nothing to do with movie theaters. While it makes sense for AMC to buy movie theaters, which it has fact, it is difficult to understand how an investment in a speculative gold company makes sense. Shareholders also had good reason to worry about management’s use of cash.
Now the company has announced its intention to issue preferred shares to investors. Although management touted it as a shareholder benefit, the move effectively opens the door for the company to sell additional preferred stock on the open market to raise additional capital. Cynical types might see this as a workaround after shareholders balked at selling more shares in 2021. It’s also reasonable to wonder why AMC poured money into a gold investment if the Money is so hard to come by that he had to use a tactic like this.
Long-term investors should be upset
The trends here are not encouraging and investors should probably be worried. AMC has had to deal with a very difficult operating environment, but some of the decisions it has made over the past two years do not seem favorable to shareholders. Although the meme stock crowd has once again started toying with AMC’s stock, sending it sharply higher, management’s actions suggest the risk here is very high.
It should also be noted that AMC recently bought back some debt on the open market at a steep 31% discount to face value. While that’s likely a good use of cash, the fact that the company’s bonds are trading below what they were sold at suggests bond investors are concerned about the cinema chain’s ability to repay them. Bondholders aren’t the only ones who need to worry about what the future holds for AMC.