AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) have at least one thing in common: The stock of both companies has been caught up in a buying frenzy this year that's led to their share prices rising at least 950% in 2021.
The remarkable increase in the stock price has created a situation where their valuations are divorced from their operating performance. Even before the pandemic, the companies were struggling to grow revenue, and pandemic-related economic lockdowns hurt their businesses even more.
With the price jump, the management of both companies saw an opportunity to raise equity by selling additional shares of stock. GameStop used the funds raised to help eliminate long-term debt. If AMC can do the same, it would help its profits soar.
Image source: Getty Images.
It is not always the case where issuing more stock can help raise profits for a firm. However, AMC stock is up 2,100% and GameStop stock is up over 956% in 2021 and both had expensive debt on the balance sheet. That combination suggests it would be prudent to issue shares to pay back debt. The cost savings from lower interest payments should offset the dilutive impact of having more shares outstanding.
GameStop managed to eliminate long-term debt
In April, GameStop sold additional shares of its stock to the public and raised $550 million in proceeds. That was enough to pay off what was remaining of the company's long-term debt. Here's how CEO George Sherman broke things down in the Q1 2021 earnings conference call:
Overall debt levels compared to the first quarter of last year were reduced by $504 million and reflect the redemption of $202 million of senior notes due in 2021, the voluntary early redemption of $216.4 million of 10% senior notes due in 2023, and the $135 million paydown of the company's asset-based revolving credit facility.
Interestingly, GameStop reported a net loss of $66.7 million in its most recent quarter and an interest expense of $24.9 million. With all of its long-term debt eliminated, that interest expense should get closer to zero.
AMC has a bigger hole to dig out of
Similar to GameStop, AMC used its inflated stock price to raise equity. In the most recent quarter, it sold enough additional shares to raise $1.2 billion. However, the figure is not nearly enough to pay off the over $5 billion of short- and long-term debt on its balance sheet. The company has reached its authorized limit on how many shares it can sell to raise equity. Management is attempting to get shareholders to raise that limit so it can raise much-needed cash. Shareholders balked at the idea.
To make matters worse, AMC's debt is a bigger burden than GameStop's was. In the first six months of fiscal 2021, AMC has incurred an interest expense of $239 million on revenue of $593 million. AMC's most recent debt issuance of $100 million in January of this year was at an interest rate of at least 15%. Overall, $1.9 billion of the company's debt is at a reasonable 3% rate, while the rest of its debt collection costs over 10%.
Besides the interest expense, AMC must consider the repayment of principal. It must pay back or refinance $580 million in 2023, $618 million in 2025, and a whopping $3.8 billion in 2026. Thankfully, management has raised the cash balance to $1.8 billion, but AMC is still generating negative cash in operations.
If AMC shareholders can agree to let management issue more stock to eliminate the company's long-term debt, it could again generate profits instead of paying out hundreds of millions of dollars in interest payments alone to lenders. Not doing so could waste a golden opportunity for the company to pay off its high-interest debt. AMC has not earned over $310 million in operating profits in any year in the last decade. Still, its interest expense is on pace to eclipse that total this year and stay higher until the company pays it down or refinances the debt.
For those reasons, it could be a major boost to the company's earning potential for shareholders to allow an additional equity sale.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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