Again in September, I mentioned the disappointing fairness providing from AMC Leisure (NYSE:AMC). The theater chain raised greater than $325 million to assist repair its extraordinarily strained stability sheet, however the dilution required was much more than initially anticipated. This week, administration celebrated the corporate’s sturdy Q3 outcomes, solely to sprint traders’ optimism the subsequent morning with one other massive fairness providing.

After the shut on Wednesday, AMC revealed its Q3 shareholder letter. Revenues of greater than $1.4 billion surged 45% over the prior 12 months interval, because the theater enterprise continues to recuperate from its pandemic blues. This quantity handily beat avenue estimates by $150 million, and was even larger than the ultimate Q3 interval in 2019 earlier than the coronavirus hit. Outcomes have been helped considerably by the success of movies like Barbie and Oppenheimer. The corporate was additionally ready to squeak out a small revenue for the quarter, additionally beating avenue estimates fairly properly.

Should you learn by the shareholder letter or learn a number of the convention name transcript, you’ll have thought the corporate was in an awesome spot proper now. Administration talked about report Q3 income and adjusted EBITDA, together with a robust money stability of $730 million. In fact, this money place solely rose due to the fairness gross sales program in Q3 that diluted traders by 40 million shares, or greater than 20%. As a reminder, that providing got here after the reverse cut up despatched shares plunging, and the unique plan was to promote 25 million shares.

AMC completed Q3 with almost 200 million Class A shares excellent. On a split-adjusted foundation, this was a reputation with solely about 5.2 million Class A shares earlier than the pandemic hit. The corporate has needed to massively dilute traders simply to remain afloat, and it nonetheless completed Q3 in a internet debt place of greater than $4 billion whereas reporting unfavourable fairness on the stability sheet over $2 billion. The corporate reported free money circulate of $8.4 million within the quarter, however that’s only a drop within the bucket for what it wants to actually survive. Even with all of that excellent news that administration talked about, plus the finished Q3 fairness providing, working capital remained extremely unfavourable as seen under.

AMC shares have been flat to barely down within the after-hours buying and selling session on Wednesday, however that utterly modified on Thursday morning. The corporate issued a press launch that it might offer one other $350 million value of shares. The morning’s low simply over $8 was solely a couple of greenback from the latest low, with shares dropping nearly all of their worth from meme-stock frenzy peak from a couple of years again of nicely over $300. An extra replace on the scenario reported that 30 million shares have been priced at $10 every, however that’s at the very least 15% extra dilution and this system would nonetheless have $50 million to go.

Whereas elevating extra funds clearly will assist the stability sheet, the newest spherical nonetheless isn’t projected to get working capital again to the inexperienced. The Q3 increase of greater than $325 million solely resulted in a $298 million enchancment within the working capital stability throughout the quarter. This newly introduced fairness gross sales plan would get the corporate’s working capital gap all the way down to about $200 million, however that also implies extra funds might be wanted within the quick time period. Don’t neglect, AMC has been utilizing loads of money to pay again long run debt, so working capital may keep fairly unfavourable for a while, leading to extra fairness gross sales sooner or later.

Given the extra spherical of dilution received’t get the working capital stability into plus territory, I’m persevering with to charge AMC shares a promote immediately. Whereas the theater enterprise is again from its pandemic lows, the corporate continues to be not producing the sort of outcomes wanted for long run sustainability. I might anticipate at the very least yet one more fairness gross sales program within the subsequent couple of quarters, and each will get extra dilutive with the inventory close to its all-time lows. I might solely contemplate elevating my ranking to a maintain if we get one other fairness gross sales spherical after this plus see one other quarter or two of respectable outcomes.

In the long run, AMC shares tumbled on Thursday after the corporate introduced one other main fairness increase. Whereas administration pounded its chest quite a bit a day earlier relating to Q3 outcomes, any enthusiasm there was rapidly wiped away by the $350 million providing. Whereas the corporate is making small steps to enhance its stability sheet, the newest 20% plus spherical of dilution received’t even get the working capital stability again to optimistic territory, which doubtless means extra fairness gross sales down the highway. Because of this, it might not shock me to see AMC shares proceed to battle.