Is It Time To Go Short on AMC’s Shares?

By Patrick von Sychowski | May 29, 2014 9:46 pm PDT
AMC logo

It has been close to six months since the initial public offering (IPO) of AMC Entertainment, meaning that senior management will soon be allowed to start selling shares that they hold in the company. Seeking Alpha therefor asks if the time is right to go short on AMC.

The question of whether AMC managers and officers will start selling shares from 15th of June onwards is an interesting one, because it partly points towards the belief in the company and its future value by those closes to it that know it best, as well as to a larger extent about the prospects for the industry as a whole.

The article ‘AMC: June 15th Lockup Expiration From IPO Could Be A Preview To A Larger Short Play In December‘ summarizes the situation as follows:

  • AMC’s 180-day lockup period will come to an end on June 15th, freeing up 361,348 shares, held by the firm’s directors and officers.
  • An additional 77.8 million shares of AMC stock held by Wanda America will remain bound by lockup agreements until December 17, 2014.
  • While the larger short opportunity for AMC could be in December, the impending June lockup expiration could provide a small window for a short play as well.

While the article says that AMC shares have experienced ‘Unsteady Gains After Disappointing IPO’, the facts are that the shares were priced at USD $18 for the IPO on 17 December 2013. This many have been on the low end of expectations, but the shares have climbed to USD $23 in less than six months, peaking at $25.47 on 7 March.

While this may not be outperforming meteoric shares like Tesla, it is in line with the solid growth of the stock market as a whole this year.

More importantly, it should be remembered that the exhibition sector’s stock market performance was significantly better than the box office itself, as we noted in our February article ‘2013 – Bad Year for Film; Great Year for Exhibitor Share Price.’

Last year was also the first year that cinemas could not count on 3D films’ ticket price hike to boost admissions takings, but had to rely more on advertising, concessions, premium large format (notably Imax) and luxury dining and seating to improve the bottom line.

Seeking Alpha acknowledges that AMC has done a particularly good job of extracting more spending from cinema goers.

Solid First Quarter Results

AMC’s report for the quarter ended March 31 indicated a number of hopeful metrics for the venerable firm. Total revenues grew 7.8% on a year-over-year basis, and admissions revenues-considered amongst the most important metrics for movie theater chains-were up 6.8%. Food and beverage revenues also grew and impressive 8.2%.

AMC also benefits from the significant degree of consolidation in the US exhibition market that has seen the share of box office revenue taken by the four largest exhibitors increase from 35% in 2000 to 62% in 2012. This consolidation process is still underway and we are likely to see the Big Four cinema chains collect two out of every three dollars spent at the box office within the next two years.

Reasons to go Short

But the issue of whether to short AMC’s shares is not primarily about the company’s profitability. Senior management might chose to sell all or part of their shares for reasons unrelated to the belief in the future fortunes of AMC. (It could simply be that they will finally have an opportunity to buy that yacht they’ve always dreamed about.)

Whatever their reasoning it is fact that on 15 June the lockup expiration will make 361,348 shares of AMC for sale, with an approximate value of USD $8.4 million, based on the closing price on 27 May.

As Seeking Alpha notes:

Evidence That Lockup Expirations Offer Short Opportunities

The results of our three years of research, along with published empirical studies by Professors at the University of South Florida, University of Kentucky, and additional institutions (Bradley, Jordan, Roten, and Ha-Chin Yi) have found that, on average, lockup expirations are associated with significant, negative abnormal returns as the sudden increase in the supply of shares on the market usually causes a decline in price. This event often opens a short window for aggressive investors.

Losses are often most concentrated in firms with venture capital (VC) backing. The largest losses have been found to occur for “high-tech” firms and firms with the greatest post-IPO stock price increases, as well as the largest relative trading volume close to the event, and the highest quality underwriters.

It is also worth keeping in perspective that the lock-up amount of AMC shares is small compared to that of internet shares like Facebook or Twitter.

Bigger Date Looms in December

A more important date looms on 17 December when the lock-up period ends for AMC’s parent company Wanda America Investment Holding Co, Ltd. and an additional 77.8 million shares of AMC stock can be sold, which thus dwarfs the current potential of shares by a factor of 215.

Given that Wanda controls 80% of shares in AMC, it is however unlikely in the extreme that it would depress the company’s share price by offloading a large tranche of shares in one go.

It should also be remembered that Wanda is in the middle of an IPO of this Chinese cinema business and that holding on to the AMC shares is a good hedge against any future fluctuations or troubles the Chinese cinema business may face.

Conclusion – Not Everyman Agrees

Seeking Alpha’s verdict is that June could see a small drop in the share price but that December is the greater unknown. While it does not say so, we see it as likely tied to the fortunes of the Wanda Cinema Chinese IPO.

More damningly, Seeking Alpha does not seem to have faith in AMC’s long term prospects.

We don’t recommend this stock as a long-term hold; though AMC has performed relatively well on the market and has outperformed other theater chains in key areas, the long-term prospects of the movie theater industry are not strong.

The rising popularity of streaming services like Netflix (NFLX), Hulu, and Amazon (AMZN) Instant Video are keeping audiences at home, and it’s hardly clear that the big screen will be able to sufficiently differentiate itself from these services through increasingly expensive “innovations” like dine-in theaters and near-ubiquitous (but often low quality) 3D films.

AMC’s management could prove the doomsayers and pundits wrong by going the opposite way in June and following the lead of UK’s Everyman Cinema, where both the Chairman and the Executive Director this week bought further shares in the company, signalling faith both in their own business and that of the cinema market as a whole.

Seem like that yacht can wait a little longer, at least for some.

Patrick von Sychowski
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