AMC Is Still Not Worth Buying At Any Price

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I put AMC Entertainment (AMC) in the danger zone in April 2021 after what I thought would be the end of its meme-stock run. My call was really early and the shares have nearly quadrupled since then. But, with a slight recovery of its pre-pandemic business, this meme-favorite is looking more dangerous than ever. As I’ll show in this report, I don’t think this stock is even worth $1/share.

AMC Has 100% Downsides

  • AMC’s shares have nearly quadrupled since my original report and are so far from business fundamentals that investors cannot directly argue that the company will meet expectations baked into its stock price.
  • AMC Entertainment is currently priced as if it will improve profitability above the historical average and generate revenue equivalent to 35% of the estimated global box office in 2030 (up from 13% in 2019).
  • With nearly $12 billion in senior liabilities and no additional cash, it is unlikely that the company will ever make enough money to satisfy stakeholders who have more claims on the firm’s cash flows than common shareholders. . I don’t think equity investors will ever see economic earnings of a dollar.
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Figure 1: Danger Zone Performance: From Original Report to 11/19/21

What’s working for the business:

AMC outperformed both the top- and bottom-line in 3Q21. Of course, the COVID-19-related shutdown led to a 77% year-on-year (YoY) decline in AMC’s revenue in 2020. From that low base, AMC posted faster YoY revenue growth in the second and third quarters of this year. In 3Q21, revenue increased 72% compared to the previous quarter and increased by more than 500% compared to 3Q20.

AMC continues to attract interest from retail investors through its acceptance of bitcoin, ethereum and other “mem-stock-like” cryptocurrencies such as Shiba Inu and Dogecoin. The company also announced plans to sell its popcorn through traditional retail outlets, such as grocery stores, in 2022, though the actual results of this plan remain to be seen.

Industry-wide, October box office sales were the highest of any month in 2021 and have grown nearly tenfold in 2020, a welcome sight in the beaten-down industry.

What’s not working for the business:

AMC has worked to sustain the meteoric growth of its stock by appealing directly to mem-stock investors and adding to the popularity of crypto by accepting crypto as a form of payment. While these actions may temporarily increase the stock’s momentum, they do not improve business fundamentals. Despite a return from pandemic lows, AMC and the core elements of the movie theater industry as a whole remain well below pre-pandemic levels. I have significant doubts that the company will ever achieve expectations baked into its stock price.

Dilution runs rampant. In the midst of its meme-stock surge, AMC heavily diluted investors. Per Figure 2, AMC’s shares outstanding grew nearly 5 times, from 104 million in 2019 to 514 million at the end of 3Q21. The dilution could have been worse, as the company announced plans to authorize an additional 500 million new shares, but later withdrew from the plan.

Figure 2: Shares Outstanding of AMC: 2013-3Q21

While the issuance of shares helped provide cash to the firm, they have done little to improve the balance sheet of the firm. Cash and equivalents sit at $1.6 billion through 3Q21, up from $418 million in 3Q20 and $100 million in 3Q19. This cash reserve won’t last long, given that free cash flow (FCF) was -$3.9 billion in 2020 and -$2.9 billion at TTM. Before the pandemic, AMC burned through $5.1 billion in free cash flow from 2014-2019.

The firm’s total debt, which includes short-term debt, long-term loans and operating leases, is $12.3 billion, only a slight improvement from $12.7 billion in 3Q20, and up from $11.1 billion in 3Q19. Overall, AMC’s adjusted debt net cash sits at $11.9 billion through 3Q21, and the company earns a very unattractive credit rating.

The rebound is well below pre-pandemic levels. Despite impressive year-on-year growth, AMC’s TTM revenue is down 72% from 2019 revenue. As I mentioned in my original Danger Zone report, the company’s core earnings were down even before the pandemic and have yet to return in any meaningful way.

AMC’s core earnings on TTM – $1.5 billion in 2020 – are slightly higher than $1.8 billion, but still significantly higher than -$30 million in 2019 and $78 million in 2018 (last year AMC earned positive core earnings) is down. See Figure 3.

Figure 3: Main Income of AMC: 2013 – TTM

The company’s TTM net operating profit after-tax (NOPAT) margin sits at -59%, up from -96% in 2020, but well below the 8% NOPAT margin it earned in 2019. Similarly, AMCs provide return on invested capital (ROIC). ) is -5% higher than TTM, which is down from 3% in 2019. Despite a disappointing recovery in 2020, AMC’s business is still in a much worse shape than it was before the pandemic.

The industry’s rebound has a long way to go. whereas domestic box office sales are well above 2020 lows in 2021, they have not yet reached pre-pandemic levels. Gross domestic box office sales during the first 45 weeks of 2021 are down 66% from the same period in 2019 and 68% from the same period in 2018. domestic ticket sales Follow a similar trend and are down 65% from 2019 and 67% from 2018.

Figure 4: Domestic Box Office Sales: 2018-2021

And may never completely rebound. Perhaps most worrying for AMC (and any other movie theater operator) is that the number of theatrical releases grew at a much faster rate than box office sales. Consumers are no longer returning to the theater as they once did.

So far in 2021, the number of films released is just 24% down from 2019 and 31% down from 2018. The gap between the number of movie releases and box office revenue indicates that the COVID-19 pandemic has created the potential for a structural shift in the movie watching experience. , With movies on demand releasing as theaters, or even just weeks later, consumers are abandoning movie theaters for the comfort of their home.

AMC is priced to take 35% of 2030 box office sales

While attempting to short AMC can be a losing proposition, I think it is important to highlight the high risk in owning a stock by setting future cash flow expectations at the current stock price. AMC Entertainment is priced as if it will improve profitability above the historical average and generate revenue equivalent to 35% of global box office in 2030 (up from 13% in 2019).

Specifically, to justify its current price, AMC must:

  • Improve your NOPAT margin by 10% (above its 5-year pre-pandemic average) [9%] from 2015-2019, compared to -59% TTM), and
  • Revenue growth above consensus estimates in 2021 (104%) and 2022 (84%)
  • Increase in revenue by 18% annually from 2023 to 2030 (1.5x 2023 consensus estimate).

in this landscape, AMC Entertainment will generate approximately $18 billion in revenue in 2030, up from its previous record revenue of $5.5 billion in 2019 and nearly half of global box office revenue in 2019.

If I guess global box office revenue goes up consensus forecast by 2025, and then from 2025 to 2030 at 3.7% per year (equivalent to CAGR from 2009 to 2019), the above scenario implies that AMC Entertainment’s revenue will equal 35% of global box office revenue in 2030, up from ~13% in 2019 and more than at any point in my firm’s model, which goes back to 2013 . For context, the second and third largest theater operators (by number of screens), after AMC, Cineworld Group and Cinemark, accounted for just 10% and 8% of global box office revenue in 2019.

This scenario also implies that AMC generated $1.8 billion in NOPAT in 2030. For context, AMC has never generated more than the $522 million in NOPAT it earned in 2018.

I think it is overly optimistic to believe that AMC will reverse the margin decline (even before COVID-19), boosting revenues well above the 2023 consensus projections and the overall industry, and gain market share previously unheard of. In the more realistic, yet optimistic, scenario below, the stock has major downside risk.

AMC has 45%+ downsides if the consensus is correct: If I assume AMC Entertainment:

  • NOPAT margin improved to 9% (5 year average before pandemic) and
  • revenue grows at consensus rates in 2021 and 2022, and
  • Revenue grows 13% per year in 2024-2030 (a continuation of 2023 consensus projections), then

stock is worth $16/share today – 45% down from current price. This scenario still shows that AMC’s revenue grows by 2x from 2019’s record level. If AMC fails to grow revenue as rapidly, or improve margins as I assume for this scenario, the stock’s downside risk will be even greater.

Figure 5 compares the historical NOPAT of the AMC with the NOPAT implied by each of the above DCF scenarios. For reference, I include Cinemark Holdings’ (CNK) pre-pandemic 2019 NOPAT.

Figure 5: AMC Entertainment’s Historic vs. Implicit NOPAT

Stores…

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