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AMC analyst on short seller squeeze: things will ‘revert back to some type of normality’

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Macquarie Analyst Chad Beynon joins Yahoo Finance Live to discuss what to expect from AMC in 2021 as Robinhood trade restrictions send the stock tumbling.

Video Transcript

AKIKO FUJITA: Shares of AMC Entertainment halted in this session after tumbling 60% this morning. That stock trading or halted at around $7, roughly $8 a share there. AMC announcing today it is issuing 44 million shares, slashing the company's debt by $600 million. This is one of those stocks that's been swept up in the buying frenzy driven by retail traders on a Reddit forum. And the stock is still up about 800% year to date.

Let's bring in Chad Beynon. He is a Macquarie analyst. And Chad, you were just saying in the break that you trade on fundamentals. So when you look at the swings that we've seen so far, what does all of it mean from a fundamental standpoint?

CHAD BEYNON: Sure. Thanks for having me. Yeah. You know, it's certainly a difficult time period, particularly for this company because, as we've heard from the CEO Adam Aron, he's a fighter and he's really tried to do everything really in the past six months to make sure that this company does not go bankrupt. He's gone to extreme lengths renegotiating rents, raising equity. You know, the announcement that you just talked about here, the Silver Lake convert. So he's done a lot of things to really put this company in a position to last for the future.

And as a fundamental analyst, you know, we have to look at some of those vehicles that they decide to participate in, some of the actions that they're taking, to talk to the management. That all goes into our thesis and our price target and our estimates. And a lot of what's happened in the past couple of days really kind of throws all this out the window.

ZACK GUZMAN: Yeah. Chad, it's tricky. Because you know, you had, earlier in the week, you know, the news that they were gonna-- that they had restructured here to kind of avoid what the CEO said would be bankruptcy within the next year. You've got that. Then you've got the Silver Lake conversion you're talking about, and it's hard to tease out how much of that dilution may have driven the pricing action we're seeing play out today. Fundamentally, that would make sense.

But of course, we're not operating at a time period where we are operating on fundamentals. It might have more to do with the fact that Robinhood and some of these other platforms are restricting AMC trading activity. So I mean, when you look at all of that, what would you say is maybe the move you would expect for management to issue new shares, if you are a company like AMC that is in trouble with bankruptcy risk still fundamentally a question?

CHAD BEYNON: Sure. Yeah. So they had a press release on the 25th of January, just a few days ago, talking about what they had done to that time period. And then they press released another release on the 27th talking about some more equity that they raised, a little under $5 per share. And to your point, you know, now that the shares are at a higher price, for a company in need of capital, in need of cash to get through the pandemic until theaters open, you know, this is certainly a time where they can reconsider that.

Now generally, when you go through the process, you're going to fill that book of new investors with, you know, investors who are focusing on the fundamentals, which at this point haven't really changed. So I think those investors who would participate in an equity raise would certainly have to look at, you know, the longevity of the business, the cash burn situation, and all of those fundamental things that we talked about. So it could be a little bit of a, you know, threading the needle type of situation for the company. But certainly, having the capital at a slightly higher price gives them another opportunity to come back and fix this balance sheet that has been the main issue for a few years now.

AKIKO FUJITA: Chad, how has your thesis shifted on the stock as a result of what we-- at least, it looks to appear or at least appears to be the growing influence of retail traders? Last time we talked, we were talking about what the cash position for the company was, the big challenges they face with the closures coming from the pandemic. And yet, now you've got a stock that's not necessarily trading on that so much as it is about looking at the shorts and then trying to squeeze them out.

CHAD BEYNON: Yeah. You know, we think everything will kind of revert back to some type of normality here with how people are thinking about the stock. You know, historically, the stock has traded anywhere between 7 and 10 times EV/EBITDA. And looking at the 2022 estimates that are out there right now, it's a little expensive compared to that historical range. You know, certainly, we have to think about these new investors who are participating here. The short interest on the name certainly has been a big issue for some investors over the past six months. So if those investors are no longer shorting the name like they were in the past, that could certainly change how we're thinking about the valuation parameters for this stock and other companies in the space.

But as we think about the theater industry, you know, there's been some studio announcements over the past couple of months in terms of going to the home. The slate looks great for 2021. So once theaters reopen, people are comfortable going back to the theaters, we're actually really bullish on what the back half of 2021 and 2022 could be. So maybe this is just the beginning of getting some people kind of, you know, focusing on the important things here.

ZACK GUZMAN: That's what's nuts. Because I mean, you be back up and look at it, we're at $6.52 a share. That's where AMC was pre-pandemic at the end of January. You kind of walk through all of this and you say, all right, look, AMC just paid down $600 million in debt because of this move that was largely fueled by retail investors who just got blocked out from trading.

You know, there are a lot of people, some of my friends, who may have been trading this stock who basically just underwrote a very risky company who may have just lost a lot of money. So if you're talking to them, you know, and they're dealing with those losses on paper or perhaps realize losses now, and you say, look, the stock's sitting where it was in January last year. It's now got its balance sheet figured out. This could be a long term play.

CHAD BEYNON: Yeah. I mean, what I continue to tell people, particularly new investors, is just take a look at the market cap of this company and other companies within the space, particularly consumer goods companies that rent space. Because that's the big thing for AMC. They have these rents and the debt obligations that have been the main issue. So when you look at a company that's worth $1 billion market cap, $2 billion, $3 billion, and then you compare it to other companies in other industries, does this make fundamental sense? I mean, that's kind of step one here.

But yes, certainly, you know, we think-- can they get back to historical highs? Not with the current demand that we're seeing. I mean, there's actions that they've taken. But this was a stock that was up in the $30s. You know, the price targets that analysts across the board have are all under where it's currently trading. But certainly, given some actions that they've taken, we'd probably have to reconsider, you know, how we're thinking about the valuation here.

ZACK GUZMAN: All right. Chad Beynon, Macquarie analyst. Appreciate you coming on here. It's been a crazy week. We'll have you back on once the dust settles, and we can look at that price target once again. But thanks for joining us.

CHAD BEYNON: Thanks, Zack. Thanks, Akiko.