Wedbush upgrades AMC amid stock conversion

The Hollywood strikes are taking a toll on Warner Bros. (WBD) upcoming movie slate, delaying the start of Dune 2. Alicia Reese, Wedbush Equity Research Analyst, joins Yahoo Finance Live to discuss the impact of the writers strike on the film industry and the market, specifically AMC Entertainment (AMC, APE). Shares of AMC continue to fall ahead of its stock conversion.

Regarding her recent upgrade of AMC, Reese said, "Our view is that there is potentially a bit of a cushion here, and one of the reasons for that is improving fundamentals. And I don't think that's very arguable. The other side that is a little bit arguable is that there is remaining retailers in the space that could continue to provide our premium valuation on the stock."

Video Transcript

DIANKE KING HALL: The Hollywood strikes taking a toll on Warner Bros. upcoming movie slate. The studio delaying the release of "Dune: Part Two" from this November to March of next year. It's bad news for the studios. But our next guest is getting a bit more bullish on the theater business. She just upgraded AMC stock and predicts the domestic box office will see a bounce of 22% this year.

Joining us now is Alicia Reese of Wedbush Equity Research Analyst. Alicia, thanks so much for joining us. So, first, what's your thesis for this, for AMC, especially when you consider this has been a meme stock trade?

ALICIA REESE: Yeah, so we rode the underperform rating from $40 two years ago all the way down to $2 just yesterday. But we got out of the way maybe a little too early perhaps. But our view is that there is potentially a bit of a cushion here. And one of the reasons for that is improving fundamentals. And I don't think that's very arguable.

The other side that is a little bit arguable is that there's remaining retail traders in the space that could continue to provide our premium valuation on the stock. It's certainly getting pushed pretty hard the last two days, so we'll see how far that goes.

But a big portion of our premise is that AMC can repay a decent portion of its debt while the stock's trading at premium levels. If it waits too long, or if the stock collapses before that, there's still quite a bit of downside. For instance, without the debt payment, and if AMC returns to a fundamental valuation, no longer getting that premium multiple, it could trade as low as in the $2 to $10 price range.

If it does pay off its debt, however, and they can do so, or pay down the debt at a significant level where the price is above $9, they could go to-- say, it's at a $12 price point, for instance, where it's trading today, they can issue over 400 shares and then get to a fundamental trading range of $8 to $10 and then return to paying a dividend and repurchasing shares from there. And with positive industry fundamentals, that positive backdrop, that would be really positive for them, I think, overall.

AKIKO FUJITA: So there's the immediate concern about debt as you highlighted which investors are focused on. But at the end of the day, this is a business that's built around theaters. You need bodies in those seats. Things have moved in a positive direction this year, at least this summer, because of the likes of "Barbie" as well as "Oppenheimer."

But when you think about the sustainability of where AMC is right now and the content that needs to move in, how big of a concern are the strikes right now?

ALICIA REESE: Sure, I think the strikes are a concern in terms of quarterly box office Some of the titles as you noted are going to be delayed. Some have already been delayed like "Dune" out of Q4 into Q1. A "Deadpool" was removed from the release slate lineup for Q2 '24. It doesn't have a new release date yet because they were in production during the strikes, and so they'll just have to wait and see when they can get back to production.

But it's just a delay the way I see it. I don't see it as incredibly harmful to the movie theaters. It's just a delay. So I still think that without "Dune" in Q4, the quarter can still end up higher year-over-year and the year should still end up well over 20%.

You have likely a 50% improvement year over year in Q3 ahead of that. And that will be likely the first quarter since the pandemic that you have a positive comparison to a pre-pandemic, you know, 2019 box-office quarter. So as the volume of this content continues to rise and improve and get closer to what it was pre-pandemic, these trends are really positive.