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what happened
of shares AMC Entertainment (asset management company -2.40%) It is down 47.8% for the week, according to data from S&P Global Market Intelligence. Cinema chains and popular emoji A new class of preferred stock was issued under the ticker symbol ape (ape -7.15%), equivalent to one common share. That’s why shares in the original AMC class have nearly halved over the past few sessions. Shares of AMC Entertainment are down 47.8% this week as of this writing.
so what
As many of us know by now, AMC turned into a meme in 2021. Even as the movie theater chain has struggled to generate positive cash flow, retail investors have pushed the stock to astronomical heights. To take advantage of this skyrocketing stock price, management kept issuing large amounts of stock to raise capital. For reference, AMC’s share count has grown from about 100 million before the pandemic to more than 500 million today.
However, due to all this share dilution, AMC has reached the limit on the number of common shares it can own. It may not be reissued without the approval of the Board of Directors. That’s where APE’s preferred stock comes in. Recently, AMC authorized up to 1 billion new preferred stock called APE, which is the economic equivalent of a share of AMC’s common stock.
What does all this mean for investors in AMC? Well, you can basically think of APE as a way to split AMC stock without technically issuing more common stock. That’s why AMC’s stock has fallen so much this week, as half of the economic value of the underlying business is now under APE preferred stock.
Over time, investors should expect the prices of AMC’s common stock and APE to converge, as they are of the same economic value. At the time of writing, AMC’s common stock is trading at $9.38 per share and APE’s stock is trading at $7.13 per share.
How to do
AMC Free Cash Flow data by YCharts
For those unfamiliar with the world of financial law, the AMC and APE stock classes are a bit strange and confusing. But if you were an investor in the company before the stock split, all those little details don’t matter because you still have the same underlying business.
Now, movie theaters are struggling to recover from the COVID-19 pandemic. AMC is burning through a significant amount of free cash flow each year. Unless that changes, any fundamental-focused investor should avoid this stock.
Brett Shaffer No positions in any of the above stocks. The Motley Fool has no positions in any of the aforementioned stocks.variegated fools have one Disclosure Policy.
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