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AMC CEO Is Buying the Dip, But It's Not What You Think

AMC Entertainment Holdings (NYSE: AMC) has been experiencing a major sell-off in the last month. Indeed, AMC stock is down by over 30% during that time. The stock is the subject of attention among traders who gather together on Reddit and other social media sites.

The decrease in AMC's stock price has the trader group encouraging each other to buy the dip. AMC's CEO Adam Aron is buying the dip in one regard, although perhaps not in the way that AMC's fanboys would like him to. Aron announced AMC would be acquiring two Los Angeles theaters that were closed by the pandemic.

Image source: Getty Images.

Buying theaters on the cheap

The deal for The Grove and The Americana at Brand theaters would have AMC reopen both to moviegoers in August. The locations have been closed for more than a year since the pandemic onset. However, in 2018 each was in the top five in terms of highest-grossing movie theaters in Los Angeles. The city itself is one of the top two cities for moviegoers, along with New York.

Here's what CEO Adam Aron had to say on the matter in a press release:

The Grove and The Americana at Brand theatres are among the most successful theatres in the greater Los Angeles area, and we look forward to delivering the high-quality experience for guests visiting these theatres that AMC is known for in the Los Angeles area and nationally. AMC is proud to be expanding in the movie-making capital of the world. And we are eager to get started as soon as possible, showcasing for our guests at these two theatres the exciting lineup of movies scheduled throughout the rest of 2021.

Acquiring competing movie theaters on the cheap could be one strategy that pulls AMC out of the financial troubles caused by the pandemic. Still, the company's balance sheet is not that strong. With $813 million in cash, $5.4 billion in debt, and operations that are just now starting to recover, it could be challenging for acquisitions as a growth strategy.

AMC shareholders can take some blame for handcuffing the company. Management proposed a vote among shareholders to authorize a sale of 25 million shares of AMC stock. The issuance had the potential, depending on investor appetite, to raise over a billion dollars in cash. That would have empowered management to buy more beleaguered theaters opportunistically or pay down its massive debt load. AMC shareholders balked at the idea. The new share sale could increase the supply of AMC stock and potentially lower its stock price.

What this could mean for investors

Although the move to buy the two theaters may be positive, it is only a small step forward. AMC is still facing a monumental turnaround task. The company lost money in two out of three years before the pandemic. Now, AMC has increased borrowing, which is making interest expenses an even greater burden. And it is still nowhere near bringing attendance to the levels before the outbreak.

The company is still overvalued compared to its financial condition. Add to that the challenges of operating a movie theater chain during a pandemic, and it's not a combination investors want to put money toward.

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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