AMC: ‘I can’t think of a company that’s been dealt the more difficult hand,’ Citi Managing Director

Citi Managing Director Jason Bazinet joins Yahoo Finance Live to discuss resuming coverage of AMC stock with a Sell rating, AMC leadership, U.S. box office growth, and the outlook for the entertainment company.

Video transcript

RACHELLE AKUFFO: Well, Citi is resuming coverage of AMC with a sell rating, noting its common equity is overvalued at prevailing levels. Here to break this down, the meme trade, is Jason Bazinet, Citi managing director. Jason, good to have you. So here we have you initiating resuming coverage with a sell rating and a $1.60 price target. So talk about that breakdown and what you're looking at in terms of how AMC can really reduce leverage.

JASON BAZINET: Well, there's really two narratives that are going on, both related to COVID. The first is AMC had to take on a lot of debt during COVID because people weren't going to the movie theater, and they're recovering from that. The second narrative that's linked to COVID is AMC became a meme stock. And so when everyone was sitting at home and sitting with their stimulus checks, this became one of the darlings. And the equity got very overvalued. And what the company is trying to do right now is essentially take its two classes of shares, the common shares and what are called the APE units, and combine that into a single class. There are some legal challenges around that.

But the real question for shareholders is, A, will they be able to combine it into a single class? And then, B, what is the new share price going to be if they are able to combine it into a single class? Is it going to be the higher share price, AMC's common stock at 4.40 a share, or is it the APE units that are valued about 1/3 as much? That's going to be the key question. If we end up with a lower, I'll call it a pro forma share price, then AMC is going to have to issue quite a few shares to pay off that debt. If they're lucky and they can raise capital with a higher common price to $4.40, then there'll be less dilution to pay down the debt. So those are the two things-- the court case and then what is the ultimate equity value where they're going to be able to raise capital.

RACHELLE AKUFFO: And another factor is going to be obviously the box office recovery. Talk about your outlook there and how that affects AMC.

JASON BAZINET: Yeah, I'm pretty humble when it comes to forecasting the box office. So we just rely on HFX, which is almost like the wisdom of crowds, and just build our numbers up. What it suggests is we're going to see a pretty decent recovery sequentially in 2023, up about 25%. But we're still going to be a couple of billion dollars below the 2019 box office number. And that's just based on what HFX is saying the various movies will do. And it's been a pretty good barometer to gauge box office expectations. So a little over 9 billion this year versus the 11 billion, which is sort of a more typical pre-COVID box office figure.

RACHELLE AKUFFO: And you know this does tend to be the year of efficiency, as Mark Zuckerberg coined it. But I want to talk about leadership. Talk about how you see the leadership in AMC with its CEO.

JASON BAZINET: Well, they've done a fantastic job. I can't think of a company that's been dealt a more difficult hand than AMC was, just given that their business essentially went to zero for, really, reasons that were outside their control. They very deftly sort of managed this entire process by issuing those APE units, trying to get it into a single class and then trying to take advantage of what I would argue is an equity value that's too high. They're trying to get their debt back under control. So they've done a very, very good job under very difficult circumstances.

RACHELLE AKUFFO: And what do you see as the biggest risk? Obviously, once you start being traded as a meme stock, a lot of things can throw you off course. What do you see as the biggest risk for AMC?

JASON BAZINET: Well, I think the biggest one is going to be this court case. I think they'll probably prevail. At least, we're assuming that they are. I mean, their bylaws are pretty clear. But, you know, strange things happen. That's certainly the big one. That's going to happen later on this spring. Then your second risk is just the box office, which is a little bit out by their control. It's a function of consumers' appetite to go out to the movies. We've got a pretty decent slate this year, but that certainly would be the second risk I'd be worried about if I was the CEO of AMC.

RACHELLE AKUFFO: And obviously, all meme stocks aren't created equal. Are there any others that you see opportunities in at the moment?

JASON BAZINET: Oh, I don't really follow anything outside my coverage universe, so I can't weigh in on that.

RACHELLE AKUFFO: Fair enough. Well, a big thank you there to Jason Bazinet, Citi managing director. Thank you for your time this morning. Have a great weekend.