AMC is betting on gold and shareholders should be furious

When the coronavirus pandemic hit in 2020, one of the hardest hit industries was movie theaters. Shares of AMC Entertainment (AMC -7.66%) plunged, and there was a real fear that the company would have to declare bankruptcy. And then something unexpected happened: the meme stocks craze. And now something perhaps even more amazing is happening with AMC, but it’s a potential problem.

Saved by shareholders

It’s hard to put AMC Entertainment down when it comes to running movie theaters. The company’s collection of movie theaters stands at 950 with a screen count of over 10,500. You don’t get that big by accident. To be fair, owning movie theaters has been a tough and competitive business for many years, given the growing use of digital home entertainment services. AMC essentially took the ladder approach, and until it was shut down by the government as a non-essential business, it performed as competently as any peer.

Image source: Getty Images.

However, not being able to show films, and therefore generate income, was a terrible burden. The company feared it was on the verge of bankruptcy, with management warning it could run out of cash. Then the meme stock craze took off, leading AMC’s stock to soar as it was caught up in the hysteria. Most long-term investors would have viewed AMC’s price hike as irrational, given its obvious problems, but sometimes Wall Street isn’t rational.

Perhaps to management’s credit, AMC seized the moment. She issued shares, despite the fact that the share price seemed too high to justify, as they were trading at levels far higher than they were before the pandemic.

Saved, but now?

That money basically allowed AMC to fend for itself during the worst of the pandemic shutdowns, and now its business is starting to recover. For example, according to CEO Adam Aron, “AMC’s fourth quarter 2021 results represent our best quarter in two full years, with positive Adjusted EBITDA of nearly $160 million, operating cash generated of more than $220 million and ending 2021 with a record year-end liquidity position of over $1.8 billion.”

A positive adjusted earnings before interest, tax, depreciation and amortization (EBITDA) was certainly nice to see, as was its revenue generated from operations. But the $1.8 billion liquidity should be put into context, noting the stock sale from above. The company still lost $0.26 per share based on generally accepted accounting principles (GAAP). The roughly $1.6 billion in cash it has on the balance sheet remains quite sizable considering it’s still bleeding red ink in a highly competitive business facing structural change (like competition from streaming services from netflix and Amazonfor example).

So when AMC announced it was buying a stake in a gold mining company for around $27.9 million, investors should have been a little worried. This sum is, of course, tiny compared to the cash flow of AMC’s balance sheet. But what exactly does AMC have to do with gold mining? The answer is clearly nothing, making it a massive diversion outside of the company’s core business. Most investors probably didn’t buy AMC with the idea that it would morph into an investment vehicle holding a portfolio of assets unrelated to movie theaters.

AMC wouldn’t be the first company to venture outside of its core business. Even iconic Coca Cola was caught up in such madness when it bought a movie studio in the 1980s. But that Coca-Cola foray ended badly, like so many when a company goes out of what it knows .

It’s time to jump ship, if you haven’t already

AMC shares have already fallen well below their meme craze highs, but they remain well above where they were before the pandemic. Although activity is recovering, it is still not quite back to where it was before the close of 2020, so the current price remains difficult to justify. Add to that the fact that a conservative investor might view the gold stake as management playing fast and loose with shareholders’ money, and there’s a significant new risk investors need to consider here. There’s a name on Wall Street for what’s going on at AMC with gold investing: diworsification. And, frankly, even if the gold deal goes through for AMC, it was still a bad idea for investors to play along.

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