Back in the day, farmers sometimes had to slam their mules between the eyes with a 2X4 to get their attention. Alas, that treatment is being administered to the Fed heads on practically a daily basis by the stock market gamblers, yet these stubborn inflation-deniers pay no attention at all.
In fact, they keep insisting there is no inflation problem, when a virulent monetary inflation thunders all around, and insist that no material financial asset bubbles are visible, when we are in the midst of the most unhinged speculative manias of all time.
For want of doubt, consider the 118% gain today in the close-to-dead movie theater chain business of AMC Entertainment. The Reddit Rowdies and their Meme Mob affiliates truly outdid themselves, bringing AMC’s market cap to an insane $31 billion at its closing peak.
That’s all premised on the “reopening” gambit, of course, but in this case it might well be asked, “reopening to what?”
After all, in the four years before the Covid crunch (2016 thru 2019) the company managed to turn $19 billion of cumulative sales into -$39 million of free cash flow. The latter represented the spoiled fruit of a cheap-debt fueled acquisition spree (theater chain “roll-up” in the parlance of Wall Street) that was a total bust as a business proposition and of an industry environment drowning in excess capacity, even as the box office numbers steadily plummeted.
Indeed, after peaking in 2002 at 1.575 billion tickets sold, the box office numbers had marched steadily down hill, even as the number of movie screens climbed steadily higher. As a consequence, ticket sales per screen have fallen off the edge – a tribute to the ability of the Fed’s falsified debt costs to finance malinvestments on a large scale.
Number of US & Canada Theater Screens, Ticket sales and Sales Per Screen, 1987-2020
1987: 22,680 screens, 1.089 billion tickets=48,020 per screen;
1994: 26,690 screens, 1.292 billion tickets=48,400 per screen;
2002: 35,690 screens, 1.516 billion tickets=44,160 per screen;
2009: 39,233 screens, 1.419 billion tickets= 36,170 per screen;
2014: 39,955 screens, 1.257 billion tickets=31,495 per screen;
2019: 41,172 screens, 1.239 billion tickets=30,090 per screen;
2020: 40,998 screens, 223 million tickets=5,440 per screen.
Yes, the industry’s catastrophic sale of what amounts to 15 tickets per day per screen in 2020 was owing to the Covid-lockdown. But what the industry is going back to at the very best is a condition in which the number of screens essentially doubled between 1987 and 2019, while the productivity per screen dropped by nearly 38%.
Oh, did we say that 1987 initiated the era of central bank money-pumping conducted by Alan Greenspan and his heirs and assigns?
That is to say, almost all of the multiplex theaters which AMC and its industry imitators pioneered after the mid-1900s, and the resulting flood of additional screens, were financed with borrowings. Moreover, those borrowings became ever cheaper as the central bankers invented one excuse after the next to drive benchmark interest rates to the flat-line, thereby fueling a frantic quest for yield among debt managers, who, in turn, funded large amounts of excess capacity in the movie theater business, among countless others.
To be sure, for the better part of the past two decades, movie theaters have been aggressively raising ticket prices, and even more so the price of Cokes, popcorn and the butter, too. For instance, between 1994 and 2019, average ticket prices rose from $4.08 to $9.16 or by 3.3% per year. And since 2009, food and beverage sales per ticket rose from $2.55 to $4.60 or by 6.1% per annum.
Altogether, that took the cost of a movie outing for a family of four from $20 in 1994 to $55 by 2019.
To be sure, these aggressive price increases for tickets and concessions generated sufficient cash flow to keep the Chapter 11 proceedings at bay. But they also set up the industry to be clobbered by the home video streaming revolution, wherein the cost of a movie dropped below that of a small Coke at the theater, to say nothing of the ticket, parking, mileage, popcorn and the Twizzlers, too.
Then came the black swan of the Covid shutdown and it was all over except the shouting. During the time in which upwards of 300 million Americans were incarcerated at home for a good part of the year, the movie business has been turned upside down.
Not only did ticket sales plunge from $10 billion in 2019 to barely $2 billion last year, but, more crucially, millions of households spent their house confinement time building home theaters, man-caves and installing giant LCD screens, while signing up for a proliferating array of streaming services.
Worst still, most of these services are owned by Hollywood based conglomerates (e.g. Disney) or wanna be studios (e.g. Netflix and Amazon) that have fundamentally transformed the studio business model. They have done so by radically narrowing the time window between theatrical release and home-streaming release – the place were AMC lives – -to the vanishing point.
Accordingly, the odds that the industry’s 41,000 plus screens, and the 8,000 operated in the US and Canada by AMC alone, will ever be profitable are somewhere between slim and none. Instead, what lies ahead is a sweeping restructuring bloodbath that will result in the closure of thousands of multiplexes or their massive, capital-intensive reconfiguration into restaurants/bars, immersive entertainment venues and massage chair emporiums, which also show movies.
That’s why today’s Meme Mob contretemps are so absurd. As shown in the chart below, during the nine years prior to the Covid strike, AMC’s free cash flow hugged tightly to the 0.00 line, averaging just $28 million per year between 2011 and 2019, and $61 million in 2019.
At today’s $31 billion market cap – a figure which more than doubled from, well, yesterday – the company was valued at 508X 2019 free cash flow and 1,100X it average free cash flow during 2011-2019.
And that happened on financial results obtained before the video streaming revolution and the transformation of the Hollywood studio model to simultaneous or near simultaneous release to the home audience.
Worse still, whatever leverage the movie theater chains had with the studios has now dissolved entirely. The chains will get their movies when the studios want, and with the unattractive economics that will germinate among cutthroat competitors desperate for customers in a drastically over-capacitated industry that is still highly fragmented.
Here are the number of screens and market shares of the major theater chain players. It doesn’t take much imagination to realize that the thin free cash flow pickings of the pre-2020 era will soon be viewed as the good ole’ days, long gone.
Number of Screens/ US & Canada Market share:
AMC: 8,043, 18.3%;
Regal Entertainment: 7,178, 16.3%;
Cinemark :4,630, 10.5%;
Cineplex: 1,695, 3.9%;
Marcus: 1,100, 2.5%;
Next 5 competitors: 2,068, 4.7%;
All other theaters: 19,280, 43.8%.
As it happened, AMC’s 18.3% of the industry is itself the product of the Fed’s money-pumping. Over the years it has borrowed billions to fund a spree of serial acquisitions that made for girth, but not profits or any meaningful return on capital.
The company’s Wikipedia write-up, in fact, catalogues its evolution as a financial-engineering driven roll-up by various financial owners including JPMorgan’s buyout fund, Silver Lake Partners and the once high-flying Wanda Group of China:
In March 2002, AMC bought General Cinema Corporation, which added 66 theaters with 621 screens to the company assets, as well as Gulf States Theaters, which had five theaters with 68 screens in the greater New Orleans area. In late 2003, AMC acquired MegaStar Theatres, adding additional theaters in the Atlanta and Minneapolis–St. Paul markets.
On January 26, 2006, AMC merged with Loews Cineplex Entertainment to form AMC Entertainment; the deal brought into AMC’s fold the entire Loews and American Cineplex chains, along with Magic Theatres (named after NBA player Magic Johnson) and Star Theatres, based in Metro Detroit. In 2010, AMC acquired Chicago-based Kerasotes Showplace Theatres, LLC for $275 million, combining the nation’s second and sixth largest movie theater chains, except for the Showplace 14 in New Jersey and the Showplace ICON theatres.
On March 3, 2016, AMC announced its intent to acquire Carmike Cinemas in a $1.1 billion deal, pending regulatory and shareholder approval, which would allow it to overtake Regal as the United States’ largest movie theater chain. The merger officially closed in December 2016.
In July 2016, UCI & Odeon Cinema Group was sold to AMC for approximately $1.21 billion, subject to European Commission approval. The acquisition was approved by the European Commission and the deal closed in November 2016.
Needless to say, even as the chain’s theater and screen count climbed ever higher, its debt and leverage literally grew like Topsy. At the end of Q1 2021, its $11.1 billion of debt stood 4.7X higher than the $2.3 billion level it posted as of March 2012.
More significantly, as AMC’s debt soared owing to its serial acquisitions and new theater building, its free cash flow didn’t. In fact, the trend below is not only the footprint of the Wall Street money-shufflers at work, but, more importantly, typical of what the Fed’s cheap debt actually produces.
Namely, it mid-wives massively over-leveraged companies that ultimately destroy jobs, production and capital, not expand it. In this case, AMC Entertainment’s leverage ratio rocketed from an already frisky 13.8X free cash flow (EBITDA-CapEx) in 2011 to a patently absurd 102.5X at the end of 2019. And that was just before its cash flow was obliterated entirely by the Covid (during the last 15 months, its free cash flow has totaled -$4.15billion).
AMC: Debt/ EBITDA-CapEx (FCF)= Leverage Ratio:
2011: $2.335 billion debt, $169 million FCF=13.8X;
2016: $4.653 billion debt, $117 million FCF=39.8X;
2019: $10.353 billion debt, $101 FCF=102.5X
So there you have it. During the company’s best days for the movie business on the eve of the Covid calamity, AMC was carrying a debt load equal to 102.5X its free cash flow – a ratio that has only gotten worse owing to the additional $700 million of debt taken on during the last 15 months to keep the company afloat.
Stated differently, the company’s stock was essentially worth nothing in January 2020, and had little prospect of escaping the debt trap that its financial owners had imposed upon it during the previous decade.
On the one hand, that pre-Covid condition itself was a screaming condemnation of the Fed’s playing god with debt and other financial asset prices. It mendaciously claims to be injecting monetary goodness into the veins and arteries of main street commerce, but what it is really doing is unleashing financial engineers and gunslingers on Wall Street to wreck companies via debt driven roll-ups, serial deal-making and strip-mining of cash flows – all designed to enrich insiders and speculators in debt, private equity and now, public equities, too.
But that’s hardly the half of it. These same egregious money-pumping policies have drastically falsified stock prices as well, turning Wall Street into a rip-roaring casino in which every remnant of free market discipline has been obliterated.
To be sure, the Wall Street wags are already saying today’s 118%, $16.5 billion eruption of AMC’s market cap was just a face-ripping short-squeeze of little consequence for the broader market.
No, it’s not.
To the contrary, it’s just another dramatic illustration of the manner in which the Fed’s crazed money-pumping has destroyed honest price discovery in the financial markets. In this case and day-after-day in precincts throughout the financial system, the factors which keep financial markets stable and healthy – meaningful carry costs for speculators, risk of ruin, professional short-sellers and much more – are being literally obliterated.
That’s why speculators can now jump the shark on any given day when the right catalyst comes along. And in this case, the catalyst was a doozy, telling you all you need to know and much more.
It seems that AMC’s CEO conspired yesterday morning with a gun-slinging hedge fund to issue new dilutive stock at what has turned out to be just 40% of today’s insane closing price. Alas, the hedgie flipped his $370 million investment within hours, which should have caused the stock to tank in a minimally rational market.
Instead, it actually incited a foaming-at-the-mouth pack of homegamers to hit the buy key in mom’s basement, even as the professional speculators took turns piling on for sport. The hideous buying frenzy amounted to nothing so much as a financial gang bang.
In short, the Fed has flat-out busted the financial markets. Irretrievably.
Yet the longer this madness goes on, the more violent will be the ultimate resolution.
And all the while these monetary mules barned in the Eccles Building take the mania-driven 2X4 upside the head day-after-day, claiming it’s not yet time to start thinking about thinking about slowing down their white hot printing presses.
Would that the Republicans trying to get even with FDR when they pushed through the 25th amendment, had thought to make its “incapacity” language applicable to the Federal Reserve.
Now would be the time to trigger it, and to save the Republic from a burst of incompetence that exceeds even FDR’s doddering last days at Yalta.
Reprinted with permission from David Stockman’s Contra Corner.
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