According to a Wall Street bear, the discrepancy between the share price of AMC common stock and its preferred stock (APE) is a sign that the market has not yet understood its purpose.
- In the second quarter of the year, AMC Entertainment distributed one preferred share to each shareholder for every share they owned as a dividend.
- Since the launch of AMC Preferred Equity units, there has been a price discrepancy between the common and the preferred stock.
- According to a Wall Street expert, the share price behavior of the APEs sends a message that the market has not understood their purpose.
AMC Preferred Shares for Every Single Shareholder
During the second quarter of 2022, AMC Entertainment announced the creation of AMC Preferred Equity units (APEs). Each AMC shareholder received one APE share for every AMC share they owned.
According to the movie theater chain, it was one of the biggest developments of the year.
The main purpose of the APEs was to allow AMC to raise capital to pay off its debt load. In addition, the money raised would also be useful for merger and acquisition funds and would be key to AMC's long-term prospects.
At first, the creation of APEs may have sounded bearish to shareholders, who feared the further dilution of AMC shares.
Since the APEs began trading publicly, their share price has dropped more than 80%, from $6.95 to less than $1 per share today. APE is now a penny stock.
The Market Is "Not Getting" the APEs
The difference in share price between AMC's common stock and preferred shares is no doubt something that has drawn attention on Wall Street. After all, in theory, the assets are the same piece of paper.
Wedbush analyst Michael Pachter, who primarily covers gaming stocks — including GameStop (GME) - Get Free Report — made some comments regarding AMC's preferred shares probably because of the "meme" issue behind the stock.
As Pachter pointed out, preferred shares are useful when a company declares bankruptcy and needs to pay its creditors. Thus, what is left of the company goes to those shareholders who own these preferred shares.
However, AMC's initiative to distribute preferred shares to each of its shareholders makes preferred shares lose their meaning, according to the Wedbush analyst.
Pachter also said that because APEs are depreciating faster than AMC common shares, this may be a sign that there is some confusion in the market.
"The market doesn't quite get it at all, and they're bidding down the preferred, but they're all going to go down together."
Wedbush's Worries About AMC's Debt
Pachter's colleague Alicia Reese, who covers AMC stock, shares his bearish sentiment toward the company. According to Reese, AMC shares should be worth $2 based on its business fundamentals.
After the latest third-quarter earnings release, the Wedbush analyst saw AMC missing a golden opportunity to write down or pay down some of its debt, which reached $5.4 billion when the APE units were first issued.
However, as AMC recently announced, in the last three months, about 3% of the APE units have been sold, allowing AMC to raise $160 million in cash.
The movie theater chain took advantage of this to repurchase about $36 million in principal debt at a 61% discount. This, added to the company's refinancing in 2022, reduces the company's total debt by $180 million.
Finally, according to Alicia Reese, AMC should make it a priority to pay off its debts and dive deeper into its partnership with IMAX. Reese also said that AMC needs to avoid "distractions" from its various new businesses and ventures, such as its popcorn branded for retail and credit card sales.
The Bottom Line
Arguably, analysts and the so-called "smart money" do their jobs by analyzing stocks based on their business fundamentals. AMC's business still has many challenges ahead, especially in proving sustainability concerning its debt and liquidity.
However, the initiative of AMC's management to issue APEs as a kind of currency to raise money seems to have been a great move. Capitalizing on the considerable short-term headwinds facing the movie theater industry and the American economy as a whole seems prudent, to say the least.
During the past year, several Wall Street analysts had predicted that AMC would become a penny stock. But it didn't. This is because, in my view, over the past two years, using AMC's fundamentals alone to predict its share price yields an incomplete story.
Today, it is estimated that the majority of AMC's float is owned by retail investors, many of them highly engaged in socially mobilized investing.
Thus, the active participation of individual shareholders is quite relevant to dictate the share price of AMC and also of APEs. The shares often disregard company-related news or business fundamentals — one of the characteristics of so-called meme stocks.