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Despite Upside Momentum, The Bears Are Moving Against AMC Entertainment
It’s never a dull moment with AMC Entertainment (AMC) in the post-pandemic new normal, as recent rumblings in the equities sector demonstrated. First, the cineplex operator reported an earnings beat for its second quarter. Next, management announced the issuance of a special dividend, which ignited enthusiasm for AMC stock.
Last Thursday, the movie theater company reported its results for Q2, delivering an adjusted earnings per share loss of 20 cents, which while in the red was nevertheless favorable against analysts’ expectations calling for an EPS loss of 23 cents. For the top line, AMC rang up $1.2 billion in revenue, above the consensus estimate calling for $1.17 billion.
Just as significantly, American consumers finally started making their way into the box office. For the three months ended June 30, almost 59 million people attended AMC locations worldwide, representing a 168% lift against the year-ago quarter. Further, the tally was up 34% sequentially against Q1 of this year. Some highly anticipated films, particularly Top Gun: Maverick contributed substantially to the fanfare.
As well, AMC stock has been skyrocketing as on the same day of the Q2 disclosure, management also declared a special dividend. The company will issue preferred equity units under the ticker symbol “APE,” which will start trading on Aug. 22. The date of record for the APE units will be Aug. 15.
Still, not everyone is convinced that AMC stock is a wise investment, with bearish traders making their thoughts known in the derivatives market.
Bold Contrarians Bet Against AMC Stock
Following the conclusion of the Aug. 8 session, AMC stock also made waves because it shot to the top of Barchart.com’s screener for unusual options activity. Pessimistic contrarians dove into the $25 put options with an expiration date of Aug. 12. On Monday, AMC closed at $23.96 in the open market.
Volume for the aforementioned put was 16,967 against an open interest reading of 110. The bid-ask spread as represented by the midpoint price ($2.91) was 3.78%, a narrow margin of difference considering how turbulent the underlying security can be. Typically, narrower spreads indicate higher levels of liquidity. In addition, the market maker is confident in the ability of properly placing this transaction.
The $25 puts weren’t the only trades associated with AMC stock that pinged unusual levels of activity, with several transactions occurring with both bullish and bearish implications. However, with a volume-to-open-interest ratio of 154.25, no other options contract tied to the cineplex operator came close to reaching the $25 puts’ magnitude of unusualness.
Before prospective investors make any decision one way or the other, they should note that the put/call open-interest ratio is currently 0.72. While mathematically, a put/call ratio of 1 indicates an equal level of puts and calls, the reality is that the equities sector has an upward bias. Therefore, a figure higher than 0.7 usually indicates bearish sentiment.
Fundamentals Are Questionable for the Box Office
Although AMC’s Q2 earnings results represented a significant swing higher from the year-ago level, the reality is that the cineplex industry has changed. Mainly, investors should be concerned about the quality or predictability of box office receipts.
Yes, it’s true that Top Gun: Maverick delivered for the otherwise flailing film industry, granting superstar Tom Cruise his first $100 million opening, per the Associated Press. Still, the question that investors, analysts and lay observers should be asking is, can Hollywood produce another blockbuster like it?
AMC stock likely depends on a positive answer to the inquiry. According to Benchmark analyst Mike Hickey, the underlying company has approximately $5.5 billion in outstanding debt. Further, AMC’s unorthodox venture into the precious metals sector via Hycroft Mining (HYMC) doesn’t provide much confidence in the way of credibility regarding box office viability.
Perhaps most importantly, the texture of the cineplex industry has changed. Back in the year 2000, the top-grossing films in the domestic box office featured a variety of genres, from action to horror to comedies. In 2019 (before the pandemic), the top films largely focused on marquee comic book and science fiction franchises.
Here’s the problem. While such high-profile movies bring in customers, they’re also very expensive to produce. One bad miss for whatever reason could sink a production studio and its myriad partners, thus presenting broader concerns for AMC stock and its ilk.
Only Speculators Need Apply
While the suddenly positive narrative for AMC stock is intriguing, shares are still down about 10% on a year-to-date basis. Therefore, unless you plan on diving in and out of this trade, those who prefer a more predictable approach to their investments should probably steer clear.
Disclosure: The author holds a small position in AMC stock.
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