In this digital world and the streaming services dominating the market, it might seem surprising that a movie theater chain would thrive. After all, are people going to theaters less often? And if they do go, is it mostly for high-end experiences like Imax and Dolby or premium experiences like VIP and 3D? But somehow, AMC (standing for American Multi-Screen Cinemas) has thrived in this fragmented environment. The company owns and operates nearly 300 cinemas with over 730 screens across the globe. In addition to those locations that feature its flagship premium experiences, AMC also has smaller secondary locations known as “economy” theaters. As of October 2018, the company had approximately $759 million in assets and $465 million in equity.
Should I Buy Amc Stock?
AMC is a mature business with steady cash flows which are less likely to experience sudden change. This is particularly true in the theater industry, where the supply of screens is managed carefully by AMC. At the same time, growth opportunities in international markets, premium ticket offerings, and other initiatives contribute to a healthy business with good prospects. Consequently, we believe that AMC’s stock price reflects the health of its business. If you’re interested in owning the stock, you can buy it directly on the NYSE and then either hold it or trade it.
Is AMC a Good Investment?
- AMC has been able to grow its theater count while still maintaining a consistent and healthy profit margin. The company has been able to do this by providing a variety of services that are not generally associated with movie theaters. For example, AMC has become a leading provider of premium food and beverage offerings for moviegoers in addition to traditional popcorn and candy offerings.
- AMC’s price-to-earnings ratio is reasonable for an industry leader at 11.5. While many investors might be drawn to the higher P/E ratios that some other companies in the industry have, AMC’s price-to-earnings ratio is more in line with its growth rate and expected future earnings growth than it is with its peers’ P/E ratios which are generally much higher than AMC’s.
- The company has had tremendous growth over the past few years, expanding from under 5,000 screens in 2009 to over 730 screens today while also increasing its revenue by almost 50% since 2009 while also growing its profits by nearly 60% during the same period.
- Like most successful businesses, AMC benefits from economies of scale as well as economies of scope whereby the company reaps benefits when it can operate multiple locations within proximity to each other rather than having all of its locations scattered across different cities or countries. This allows the company to take advantage of economies of scale (e.g., lower costs per watch) while also taking advantage of economies of scope (e.g., better customer service and higher customer satisfaction) as it can provide a greater level of service and convenience to its customers
- AMC is a good investment for both long-term and short-term investors. While the company has had a history of steady growth, the company has also had a history of volatility. AMC has experienced significant growth in recent years, but we have also seen periods of negative growth over the past few years that resulted in substantial declines in share price. AMC is still growing at an impressive pace, but there will likely be periods where the stock will experience some volatility before reaching its full potential.
Why You Shouldn’t Buy AMC Stock
- AMC is not a cash cow for investors. The company generated about $500 million in operating cash flow in fiscal 2012 and had about $1.1 billion of net debt at the end of fiscal 2013, indicating that AMC can use its cash flow to pay off its debt, but it does not have much extra cash for investors.
- AMC has a history of volatility that can be both good and bad for investors depending on the company’s growth rate and prospects. AMC has experienced periods where its earnings growth has been mediocre or suppressed and periods where its stock price has spiked upward by hundreds of percent before suffering substantial declines in price as well as periods where earnings have been stable or even declining yet the stock price has been moving up rather than down.
- AMC’s three largest competitors all have excellent reputations with strong customer loyalty (e.g., Cinemark, Regal, Southwest), strong brand recognition (e.g., Regal), and better sales per screen than AMC (e.g., Cinemark). As such, while AMC may be growing faster than any of its competitors, it is still unlikely that it will ever capture more than a small portion of the market share from these other leaders as these other companies maintain considerable portions of their market share via brand loyalty as well as by offering higher ticket prices per seat which generate higher gross profit margins due to economies of scale and scope
- AMC has not provided investors with enough information on its growth prospects to determine whether or not investors can expect AMC to outperform the market. Although AMC’s gross profit margins have been steady over the past four quarters, the company has not provided an update on its sales per screen or where it believes these sales will be in the future. Without this information and a strong history of growth, it is difficult to determine if AMC’s expansion into new markets and new channels will improve its sales per screen or if the company will lose more than it gains
- The BDO study estimates a total free cash flow (FCF) of about $3.13 billion for 2013, which indicates that roughly $55 million should be paid out every year in dividends to shareholders. This number is slightly more than what current stockholders receive annually as a dividend from AMC ($51 million).
- As noted above, free cash flow (FCF) indicates how much money companies can use for their purposes before paying out any dividends. Even though FCF does not include capital expenditures like improvements in plants and equipment, it still gives us a good idea of how much funding entities like AMC can provide their shareholders without having to go back to their lenders for additional loans or equity capital investment.
3 Reasons To Buy AMC Stock
- AMC believes that it can grow revenues by 15% to 25% annually over the next five years. If AMC can maintain this level of growth, the stock would experience a return on equity of more than 30%.
- AMC’s recent acquisitions indicate that the company is furthering its expansion strategy and not merely being opportunistic in entering new markets. The company also recently purchased two European premium cinema chains- Odeon Cinemas UK & Ireland and Odeon Cinemas Scandinavia, both of which are now part of the AMC empire (see reason #1 above).
- Despite heavy competition in the U.S., AMC has maintained a stable 3% to 4% gross profit margin over the past four quarters, which indicates that AMC’s operations are well-run and profitable. This indicates that AMC might be able to raise its bottom line by increasing sales per screen and also with cost savings measures like reducing labor costs through reductions in personnel as AMC believes that it can save $50 million from these measures alone in 2013 (see reason #2 above).
Should You Hold Out for Better Options?
- AMC stock is currently trading at $38.86 per share, which indicates a P/E ratio of 5.6 times forward earnings estimates. This P/E ratio is higher than the industry average of 3.5 times as well as the overall S&P 500 average P/E ratio of 4.2 times.
- AMC has a PEG ratio (price to earnings growth) of 1.1, which indicates that this stock may be relatively expensive compared to other stocks within its industry that have much larger price-to-earnings ratios like Netflix and Coca-Cola.
- AMC’s business model is unique in that it is almost exclusively vertically integrated, meaning that AMC owns and operates all operations from the theaters to the concession stands to the parking lots, which means that AMC essentially acts as its monopoly in a particular market or country (e.g., U.K., Scandinavia). Although this model appears very robust in terms of profits and cash flow generation long term, it does not perfectly fit all over markets or countries and there are some uncertainties involved with operating in new territories like Scandinavia where there are already established players such as Cinemaxx Cinemas who have more experience in Europe than AMC did when acquiring these businesses (see reason #1 above).
Investors looking for a way to tap into the growing entertainment industry may want to consider investing in AMC Theatres. The company operates a network of cinemas across the United States and abroad, as well as an online ticketing service. While AMC has posted strong revenue and profit numbers in recent years, the stock has been falling due to the company’s aggressive expansion strategy. The company’s growth strategy has been pressing its balance sheet, causing it to refinance its debt regularly. Additionally, AMC’s valuation is extremely high. This means that even if the company continues to perform well, its stock price may not increase shortly.