Earnings Battle: AMC vs Monster Energy

Two entirely different companies and business models as our focus for stocks of the week. One shot to fame during the pandemic, and the other quietly goes about life as the company with the best 20 year performance in the S&P 500. Both report earnings this week. How will they stack up?

AMC rose to prominence in 2021. The firm was on the brink of bankruptcy before retail investors rode to the rescue and hedge funds caught short the stock struggled to unwind their positions. Circumstances combined to produce an immense short squeeze and mania that saw the company's valuation swing from $500 million to as much as $25 billion.

Quickly recapping, Coronavirus forced AMC’s movie theatres to close. It was widely believed that these closures and the shift to streaming content would spell the end for the chain.

But CEO Adam Aron took a gamble. The company raised funds by selling shares into the squeeze, restructured debt and recapitalised. However, yesterday’s solution is often tomorrow’s problem. By creating a retail heavy investor base, the company lost the votes. Retail shareholders don’t tend to get involved in the voting process. So when AMC wanted to approve the issuance of more common stock, they simply couldn’t get the numbers.

Even if they could reach everyone, would they vote for dilution? Some might suggest that if you can sell more stock at a valuation that’s far higher than any reasonable assessment of the fundamentals, it’s not dilution. But perhaps that ignores who the main holders are and the high prices many have paid…

In any case, Aron had another solution. Issue APE’s. AMC Preferred Equity units. Essentially a different unit of stock that wasn’t subject to the same issuance restrictions, and was distilled down into units equivalent to 1/100th of a preferred share. It's all pretty technical and boring.

The key point is that those APEs are expected to be converted into common stock at a meeting scheduled for March 14th. Unsurprisingly, some shareholders aren’t happy with the plan and have asked to postpone the decision for 60 days while the court challenge is heard.

The AMC story is all about peak financial engineering. Here’s the kicker. AMC shares currently trade at just over $6. APEs are trading a little over $2. If the deal is agreed, those share prices would both represent the same thing. AMC common stock. So what’s the true value? And will one converge to the other?

The company is scheduled to report earnings after the Tuesday (28th Feb) close although the APE situation is likely to be just as important to the share price as the revenues.

The contrast with Monster Beverage couldn’t be more stark. Just look at this 20 year performance:

The 2015 deal with Coca-Cola has delivered in spades. Coca-Cola bought a 16% stake in Monster Beverage, acquiring Monster’s non-energy business in the process. In return, Monster took Coca-Cola’s energy drink business.

However, the real boost was gaining access to Coca-Cola’s immense manufacturing & distribution network. You’ll find Monster Beverages everywhere now, taking full advantage of Coca-Cola’s sway in shelf placement and marketing knowhow. Monster’s recent success has been built on the back of infrastructure that the company hasn’t paid to build. That capital efficiency means that the company has no long term debt and a respectable business moat.

Monster Beverage earnings are scheduled to be released after Tuesday’s market close.