Financial market traders are buzzing about AMC Entertainment (NYSE: AMC), but not necessarily in a positive way. Just recently, the company announced a large-scale issuance of its “special dividend” preferred equity shares, also known as APE (NYSE: APE) stock. This is problematic as it raises questions about how far AMC Entertainment is willing to go in order to raise capital. I am neutral on AMC stock.
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AMC Entertainment is a popular American movie theater chain. However, on Wall Street during the past year or two, the price moves of AMC stock haven’t always reflected the state of the U.S. cinema market or of AMC Entertainment in particular.
Rather, the share price has largely been a function of meme stock trader enthusiasm, along with AMC’s CEO Adam Aron’s knack for getting the “apes” stirred up. Aron is an adroit marketer and promoter, but cautious investors might wonder whether the company is getting ahead of itself when it comes to share issuances and whether AMC stock has a fair shot at getting back to breakeven.
AMC Entertainment Investors Need to Monitor Two Different Assets
You could call it a “tale of two stocks,” if you’d like. First of all, there is good old-fashioned AMC stock, which unfortunately has been a poor performer in 2022 so far. Then, along came the special dividend in the form of APE preferred equity shares. Investors really need to pay attention to what’s happening with both of these assets, as news surrounding one of them may influence the other one.
Let’s rewind and review how APE stock came into existence. In early August, AMC Entertainment announced its plans to issue a dividend to all of the company’s common shareholders, and this would take the form of preferred shares. Of course, the “APE” ticker symbol was a thinly veiled tribute to the “apes” that supported AMC Entertainment through thick and thin.
Why not just go ahead and issue more AMC stock shares? As the Wall Street Journal explained, AMC Entertainment “can’t issue more common stock…because it has already issued so many shares that it is facing the limit under its corporate charter.” So, the APE share sale was basically a workaround.
Skeptics thought this was a publicity stunt and a questionable way to raise capital at the expense of gullible investors. Nevertheless, AMC stock quickly moved higher, and so did APE stock at first. These gains weren’t destined to last, however.
Both AMC and APE shares have lost value since that special dividend issuance. Still, Aron takes pride in this share issuance strategy, declaring it “perhaps the single biggest action we will take in all of 2022 to fundamentally strengthen AMC for the long term” and assuring that it “dramatically lessens any near-term survival risk for AMC.”
Supersized APE Share Sale Causing Anxiety for AMC Stockholders
Moreover, it appears that even while the company can’t currently create and sell more AMC shares, it won’t hesitate to issue more APE shares. Since the two stocks are related, it’s important for AMC stockholders to know that AMC Entertainment just announced a potentially mega-sized APE share sale.
Reportedly, AMC Entertainment has hired Citigroup (NYSE: C) as an underwriter to assist the theater chain in selling as many as 425 million APE units. Interestingly, this wasn’t announced on AMC Entertainment’s investor relations news page.
It’s all over the financial media, though, and is a hot topic on stock trading message boards. Your best bet as an informed investor, however, is to get the facts first before delving into people’s opinions and speculations.
To get the verifiable facts, you’ll want to carefully read the SEC filing associated with this massive APE share issuance. First of all, it notes that AMC Entertainment is offering up to 425 million AMC preferred equity units so that up to 941,820,595 of these units will be outstanding after the offering.
That would be a whole lot of shares in circulation. Adding to the anxiety is AMC Entertainment’s stern warning in bold font: “Under the circumstances, we caution you against investing in our AMC Preferred Equity Units, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
This warning, along with the realization that AMC Entertainment really can’t be stopped from creating and selling even more APE units in the future, struck fear into AMC stockholders. Thus, AMC shares lost ~10% of their value on the day of the APE share sale announcement.
Is AMC Stock Projected to Go Up?
Turning to Wall Street, AMC stock is a Moderate Sell based on two Holds and three Sell ratings. The average AMC Entertainment price target is $5.53, implying 19% downside potential.
Conclusion: Should You Consider AMC Stock?
AMC Entertainment clearly has no qualms about issuing large quantities of its preferred equity shares. AMC and APE stocks should be considered as related assets, so anxiety-inducing news about the over-issuance of APE shares is a major concern for AMC stockholders.
Therefore, it’s fine to maintain a safe distance from both of these assets. Aron is adept at rallying the troops – or, should I say, the apes. However, AMC Entertainment might need to tap the brakes on its capital-raising efforts before AMC and APE shares lose more of their value.
