Marti157900
AMC Entertainment (AMC), a movie theater company, has been the subject of ‘meme stock’ speculation over the past few years which saw it rise hundreds of percentage points on the backs of traders pushing it up without much fundamental basis. But over the past few months, the company’s share price has returned back to earth and is not in a point where it may be fairly valued, or even a little undervalued.
With more and more movies coming out over the next few months and with the return of people around the United States and the world to movie theaters after the COVID-19 pandemic, I expect the company to see increased revenues slightly beyond what current projections are calling for.
Since they have a decent amount of cash and operating cash flow projections, I believe they are positioned quite well to take advantage of the expected increase in movie-going and with a 20% of float short interest by those (like myself) who have been betting against the meme stock traders – this can head north quite quickly on the backs of solid fundamentals improvements.
Let’s dive in.
Meme Stock Status Is Fading
The best indicator for this trend is volume. On websites like Reddit and others, novice traders talk up a stock to a point that pushes it very high and well out of the realm of reality for the fundamentals that the company holds. For AMC, share price was pushed to a peak of over $55.00 per share, valuing the company at a multiple way too extreme for the growth (or lack thereof) they were expected to show.
Since then, however, the company’s share price has been subject to reality and with each corresponding financial statement release, the company’s share slowly but surely returned down to around the $7.00 to $8.00 per share mark, which is just about fair value at 10x earnings multiple they were reporting before the COVID-19 pandemic shut down the global economy and businesses.
So where do we go from here? More reliance on movies being seen exclusively in movie theaters before being released on streaming platforms and the need for ‘going out’ by a population which has been indoors for a year and half. Let’s explore how the company is positioned to take advantage of these factors.
On Solid Footing Despite Sentiment
You don’t need to look very far to see the negative sentiment around AMC. If you scroll through the Seeking Alpha articles page you see dozens of negative articles by a variety of contributors and if you do a Google News (GOOG) (GOOGL) search, most articles will be negative surrounding their recent preferred shares offering (APE). But when you dive into their fundamentals, it’s not actually all that bad.
Although the company reported major losses throughout the various stages of the pandemic, they are slowly but surely returning to a place where they may report a profit and are prioritizing a heathier balance sheet to facilitate that. While the new APE preferred shares offerings may be seen as a desperate move which will hurt the stock in the short run, I view it as a positive. Since interest rates are so high, this is a better way to raise an anticipated $1.4 billion than to tap those higher interest rate loans and debt and with the company working on retiring the high interest rate debt portions over the past few quarters – I’m optimistic this will help them outperform profit projections.
Here’s the factors I see as positive:
The company’s overall debt increased over the pandemic as the company used long term debt at low interest rates to help finance their operations when revenues were near nothing. As their debt went from $4.7 billion to $5.7 billion, they’ve been paying off their higher interest debt which was taken on during the 2015 to 2019 era of higher interest rates. This, I believe, will help them increase their profit margin and lower their interest expense payments.
The company’s interest expense in the latest reporting quarter was just under $81 million, compared to just under $90 million in the same period last year. The upcoming quarter will be a good test, as they paid a record $153 million in interest expense in the same period last year, so if they’re able to report around $80 million to $90 million in interest expense, that means very good savings and a potential shortening in the timeline necessary for profitability.
The cost of revenues are limited for the company with their established presence in multiple markets. This means that as revenues increase, the cost of those revenues as a percentage of those revenues doesn’t increase at the same rate. In the latest reporting period, the company reported revenues of just under $1.2 billion with the cost of those revenues being about 85%. This is compared to the same period last year where they reported revenues of about $445 million where the cost of those revenues were 128%.
If we look further back to the quarter before the pandemic, the cost of revenues as a percentage of overall revenues was down to just over 79%. This means that the ore revenues the company generates, the higher the gross margin will be. This is contrary to a lot of companies which have a set amount of each revenue dollar which is realized – with AMC, they just need to get people in the door and their profit margins will increase over time without exerting any more effort to maximize those margins.
The Road To Outperformance
Right now, analyst estimates for the next 3 years call for improvements in the company’s top and bottom lines but nothing to write home about, and certainly nothing to warrant any material change in valuation. They still project the company won’t report a profit over those 3 years while revenues do return back to pre-pandemic levels. This is where I differ from analyst views.
Here are those revenue projection numbers:
| 2022 | 2023 | 2024 | |
| Sales | $4.29 billion | $5.07 billion | $5.22 billion |
| Growth | +69.8% | +18.0% | +3.03% |
(Author Note: There’s a 4th year of revenue and EPS projections but it’s only done by a single analyst, which I try and avoid at all costs)
As revenues return to the $5 billion mark, profits are still expected to remain rather week, even though at those levels before the pandemic, the company was making a profit. Here are those figures:
| 2022 | 2023 | 2024 | |
| EPS | $(1.10) | $(0.54) | $(0.42) |
| Growth | +56.2% | +51.1% | +20.9% |
(Source: Seeking Alpha Earnings Projections Aggregator)
While I in no way, shape or form believe the company will report a profit in the coming year, I do believe that these projections are very conservative as the company works on minimizing their overall expenses.
The last time the company reported about $5 billion in revenues they reported about $110 million in profits, which was $0.91 in earnings per share. While this can become more complicated with new share offerings, the profitability may be easier to achieve as the cost of revenues have improved somewhat and as interest expense remains on the lower end relative to then.
The company reported paying about $300 million in interest expense on $4.7 billion in long term debt. Currently, they have over $5.3 billion in long term debt and are projected to pay about the same interest expense as then. Therefore, I believe that by next year, the company’s debt reduction efforts (at least those with higher interest rates) will mean that, I believe, they will report interest expense under $300 million, which can lead to a profitable year.
Conclusion: Profitability Leads To Short Squeeze
While the aforementioned factors are conducive to the company being positioned for longer term success, the short term ramifications of a surprise profitable quarter or several means that the company’s share price is likely to react rather quickly.
Given that about 20% of the company’s shares are held short, the closing of these positions can result in further upwards movement, which can aid an investment return. This isn’t the only factor by any means, but it’s an added bonus given that with a continued reduction in interest expense, the company can report an EPS growth rate which justifies a 20x price to earnings multiple, resulting in the potential share price fair value at around $10.00 per share.
That would be a 42% return, which I believe can happen over the course of the next 24 to 36 months. That’s not too bad at all in the current market.
I have turned bullish on AMC Entertainment and will be initiating a position over the coming week and a half.
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