Cars drive by the AMC Metreon 16 theaters on August 10, 2021 in San Francisco, California.
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Wedbush lowered its price target on AMC to $2 from $4 and reiterated its underperform rating on the stock following its launch of the company’s preferred shares on Monday.
The new price target reflects the higher share count of AMC with the new preferred equity. On the first day of APE trading, combined shares lost $800 million in enterprise value from Friday’s closing price of $18.01, according to the note. AMC closed at $10.46 while APE ended the day at $6.
“While it makes little sense for APE to trade below AMC, we think that it reflects concerns over impending dilution,” Alicia Reese wrote in a Tuesday note. “AMC is pre-authorized to issue up to 4.5 billion additional preferred shares of APE to raise cash.”
AMC shares rose 1.6% in the premarket Tuesday, while APE jumped 9.2%.
She added that she expects the company to wait for APE shares to trade more inline with AMC, then issue some of the authorized APE shares for cash to pay down outstanding debt.
“We note that at the August 22 closing price of $6, AMC would have to issue over 900 million shares of APE to repay its entire debt balance,” Reese wrote. “While AMC can issue up to 4.5 billion APE shares, we expect it to issue far less, and wait for a more opportune time to do so.”
In addition to paying down debt, AMC will likely use extra cash to upgrade its theaters in Europe and Asia faster, making it a more attractive long-term investment, according to Reese.
“This would also free AMC up to reinstate its quarterly dividend much sooner than it would have otherwise,” she wrote.
Reese also noted that the Cineworld bankruptcy should not impact AMC as it doesn’t relate to negative industry dynamics. Overall, AMC is trending in the right direction as the industry normalizes.
“AMC continues to right-size the ship by repaying and restructuring debt, acquiring more quality screens while removing underperforming screens, and making inroads into secondary revenue sources, including alternative content and retail popcorn sales,” Reese wrote.
—CNBC’s Michael Bloom contributed to this report.