AMC Entertainment Holdings (AMC)

AMC Entertainment Holdings (AMC)

Summary:  Overpriced

Score:  5/20

MOS:  1%

Share Price:  $24.50

Sticker Price:  $24.78

The previous Tykr review on AMC was completed on October 15, 2020. At that time the summary was as follows:

Summary: Overpriced

Score:  5/20

MOS:  1%

Share Price:  $2.95

Sticker Price:  $2.96

Is AMC (AMC Entertainment Holdings) a good investment?

The increase in share price over the last year is primarily due to the short squeeze in 2021. We’ll touch on that in a moment. Since that squeeze, the stock has been slowly selling off. Let’s dive into this business to learn where AMC has been and where it’s going.

AMC was founded in 1920 and is headquartered in Leawood, KS. AMC is the largest movie theater chain in the world. They have 2,200 screens in 244 theaters in Europe and 8,200 screens in 661 theaters in the US.

 

Interesting Facts

  • AMC was founded by Maurice, Edward, and Barney Dubinsky, traveling melodrama performers. They originally named the theater Durwood Theaters.
  • By 1961 they had 10 theaters which were located around Kansas.
  • In 1963 they built their first multiplex model which is essentially a building with multiple screens. From an economic standpoint, this allowed the same number of staff to manage multiple screens at once. A business model that proved to be significantly more profitable.
  • In 1968 Durwood Theaters was renamed Royal Cinema but soon after the name was changed to American Multi-Cinema.
  • By the 1980s they started experiencing significant growth and in 1983 they originally went public.
  • In 1985 they built their first multiplex overseas. A 10 screen theater in the UK.
  • In 1988, they announced a joint venture with United Artists and Cinema International Corporation (a partnership of Paramount Pictures and Universal Studios) to operate under the name AMC.
  • In 1995 they pioneered the megaplex which was a theater that could accommodate thousands of people at once. The first one opened in Dallas, TX.
  • In 2004, AMC was acquired by Marquee Holdings, an investment vehicle controlled by J.P. Morgan Partners. This event caused AMC to go private.
  • In 2006, AMC announced a new IPO but due to uncertain market conditions, the plan to go public fell through.
  • In 2010, AMC finally went public again.
  • In 2012, AMC was acquired by Chinese conglomerate Wanda Group for $2.6B. The acquisition made Wanda the world’s largest cinema chain.
  • In 2016, AMC acquired Carmike Cinemas, which had 276 theaters and 2,954 screens in 41 US states. Carmike rebranded its theaters to AMC.
  • In 2017, AMC announced it would cut costs by $30M by reducing operating hours and cutting staff. The company started to experience profitability issues due to the increasing popularity of streaming services like Netflix.
  • In March of 2020, AMC announced the closure of all theaters due to Covid-19. 
  • In April of 2020, AMC announced it would no longer carry films from Universal Pictures after NBCUniversal CEO Jeff Shell commented on The Wall Street Journal that the studio wanted to release films via streaming at the same time as theatrical releases. 
  • In June of 2020, AMC stated it had “substantial doubt” that it would remain in business.
  • In July of 2020, AMC and Universal resolved the dispute with AMC agreeing to a shorter theatrical window of 17 days before Universal could release their films on streaming.
  • In August of 2020, AMC began opening select locations in the US. In honor of the company’s centennial year, AMC offered movie tickets for $.15 and promoted the offer as “Movies in 2020 at 1920 prices”.
  • AMC tried to open two thirds of it’s locations in time for the September 2020 release of Tenet.
  • In January of 2021, AMC stated that it had raised $917M in new funding. They believed the new funding should allow them to survive the effects of Covid-19.
  • One day after the announcement of the $917M in new funding, the Reddit community (r/wallstreetbets) started a short squeeze. Essentially, large institutions were betting against AMC (shorting the stock) and the Reddit community started buying massive volumes of shares to cause the large institutions to lose money. The share price surged by 300%.
  • In March of 2021, AMC announced its revenue had fallen by 88% year-over-year. CEO Adam Aron stated “this is the most challenging market condition in the 100-year history of the company.”
  • Later in 2021, AMC announced it would accept Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and Dogecoin with the motive to attract more customers back to theaters. AMC also announced it will try to host musical events, NFL games, and UFC fights as another way to increase revenue.

Looking at the history of AMC, before Covid-19, the theater business model started to see a decline even in 2017 due to the increasing popularity of streaming services. Covid-19 essentially accelerated the demise of this business model.

With the growing popularity of online streaming platforms such as Netflix, HBO, Amazon, Disney+, Hulu, and Apple TV+ people are finding that viewing movies and TV from home is much more convenient. 

Personally, I love movies and some movies are specifically made to be viewed in a theater.  For example, movies such as Christopher Nolan’s The Dark Knight, The Dark Knight Rises, and Inception are shot on IMAX and intended to be viewed on a large screen but not everyone appreciates the big screen like I do.

Let’s dive into the economics of movies for a moment.

Today, if a family of four wants to visit the movie theater in the US, they might pay close to $100 (Estimated prices below).

  • 2 adults x $15 per ticket = $30
  • 2 children x $10 per ticket = $20
  • 1 bag of popcorn = $10
  • 4 sodas x $6 per soda = $24

Total = $84

Ouch!

Now compare that to staying in and watching a movie on Disney+. That only costs you $6.99/month and you can watch unlimited movies! From the consumer economic standpoint, it doesn’t even make sense to see movies in theaters.

Now let’s dive into the business side.

A movie theater doesn’t actually make a lot of money on movie ticket sales. Movie theaters make money on food and drinks.

Here is how the movie ticket sales break down for theaters.

  • Weeks 1 and 2: Most theaters will take between 0% and 25% of the ticket sales. In many cases, theaters will take 0% to get top priority on movie showings.
  • Weeks 3 and 4: Movie theaters can take 45% – 55% of the movie ticket sales. At this point, the number of tickets purchased for new releases has significantly dropped and movie studios are willing to give more profit to the theater.
  • Week 4 and after: Some movies will drop from the screens but if they don’t the profits can hold at 45% – 55% or increase slightly based on contract agreements.

 

News

This article from TheWrap.com states the first successful theatrical release that skipped theaters and went straight to digital was Trolls World Tour which was released in March of 2020.  The movie was produced with a budget of $90M and within three weeks of the release, the film earned $100M through digital rentals of $19.99. I did some homework and found that movie studios will usually take about 80% of the digital rental revenue.

This article from screenrant.com quotes James Gunn (director of Guardians of the Galaxy) saying the legacy of movies is not sustained by theaters, it’s sustained by TV. Yes, people may go to the theater one time but they watch movies over and over from the comfort of their own home. This speaks to the fact that even people who work in the movie industry are embracing the increasing popularity of streaming.

This article from criteo.com states that streaming revenue is expected to grow 60% from 2020 to 2025. Criteo surveyed 9,000 people asking why they prefer streaming and their reasons include they can watch movies and TV shows anytime and anywhere, there is a massive selection to choose from, they can watch content in HD and 4K, and streaming apps are increasingly easy to use.

This article from cnet.com states how TVs are becoming significantly cheaper for customers because the costs to manufacture have become cheaper. Here is a comparison on TV prices over the previous decades. 

  • 65” 4K TV in 2021 – $899
  • 65” 4K TV in 2012 – $2,500 – $6,000
  • 50” HD TV in 2007 – $7,000
  • 40” Plasma TV in 1997 – $22,000

To give you perspective, there used to be a thing known as a “TV Repair Service.” Have you ever heard of a TV Repair Service? I’m sure you would have to go back to the 1980’s or 1990’s. For some of you readers, this is probably well before your time. Today, TVs are so cheap that if they stop working, consumers simply throw them out and buy a new one. The point is, the barrier to entry for watching high quality content in your own home is extremely low.

 

Competitive Comparison

AMC Entertainment (AMC)

Summary:  Overpriced

Score:  5/20

MOS:  1%

Share Price:  $24.50

Sticker Price:  $24.78

Revenue: $1.2B

 

Cinemark Holdings (CNK)

Summary:  Overpriced

Score:  6/20

MOS:  1%

Share Price:  $16.26

Sticker Price:  $16.45

Revenue: $686M

There are other movie theater chains including Marcus Theaters, IPIC, Cineplex, and IMAX but all are private.

 

4Ms

MOS: The financials are awful. With Tykr, On Sale stocks are stocks with a score equal or greater than 10 and a MOS equal or greater than 50%. In this case, a score of 5 and MOS of 1% shows the financials are in rough shape. When you take a closer look at the financial status you can see that revenue went from $5.4B down to $1.2B and net income went from -$149M down to -$4.5B. I’ve seen some terrible financials but AMC is near the top of that list. 

Meaning: Whether people believe theaters will come back or not, the numbers don’t lie. Theaters opened back up in 2021 and people still prioritize viewing movies from the comfort of their own homes. Even if theaters try to add musical events, NFL games, and UFC fights, people will not leave the comfort of their own homes and rush to theaters.

Moat: This is no longer a situation where theaters are competing against other theaters. This is a situation where theaters are competing against the market. In September I wrote an article on GameStop and compared their demise to the fall of Blockbuster video. When the market changes, no matter how much you hope and pray a business will survive, the market usually wins. In this case, theaters are a dying breed. The question theater owners should be asking is what can I do with the real estate? 

Management: Adam Aron is the current CEO of AMC. Prior to AMC he served as President and CEO of Norwegian Cruise Lines from 1993 – 1996 as well as Chairman and CEO of Vail Resorts from 1996 to 2006. In 2006, he formed a personal consultancy and in 2015 he was named CEO of AMC. Aron definitely has great experience in the entertainment and travel industries but no matter what his experience is, fighting the demise of the theater industry is an uphill battle. I would be very curious to know the discussions he’s having with his colleagues as well as the board of directors. What are their plans for the future? How will AMC monetize their real estate? I know vacant malls are being converted into fulfillment centers for companies like Amazon. How will theaters pivot to a profitable enterprise?

 

Financials 

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2017:  $5B

2018:  $5.4B

2019:  $5.4B

2020:  $1.2B

Revenue has sharply declined in 2020 which is an obvious red flag.

 

Net Income (Found on the Income Statement)

2017:  -$487M

2018:  $110M

2019:  -$149M

2020:  -$4.5B

Net Income has also sharply declined in 2020 which is another major red flag.

 

EPS (Found on the Income Statement)

2017:  -3.82

2018:  0

2019:  -1.44

2020:  -44.19

The EPS drop in 2020 is substantial. This is a reason why the MOS is 1%.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  -$68M

2018:  -$53M

2019:  $60M

2020:  -$1.3B

Free Cash Flow has sharply declined as well.

 

Total Assets (Found on the Balance Sheet)

2017:  $9.8B

2018:  $9.4B

2019:  $13.6B

2020:  $10.2B

Total Assets have decreased since 2019. We like to see assets increasing.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $7.6B

2018:  $8B

2019:  $12.4B

2020:  $13.1B

Total Liabilities have increased. We like to see liabilities decreasing.

 

Total Debt (Found on the Balance Sheet)

2017:  $4.3B

2018:  $4.7B

2019:  $5.3B

2020:  $6.3B

Total Debt has increased. We like to see debt decreasing.

 

Total Equity (Found on the Balance Sheet)

2017:  $2.1B

2018:  $1.3B

2019:  $1.2B

2020:  -$2.8B

Total Equity has sharply declined which is a red flag.

 

This review is an example of looking past the numbers and looking at the business model to confirm if a stock is a good or bad investment. With the MOS, the financials are already too weak but the meaning is the definitive reason not to invest in AMC. Theaters are a dying business model. They are doing their best to hold on but the growing popularity of streaming services can’t be slowed down. Theaters have opened and those who want to see movies in theaters have already started going but the vast majority of consumers have decided that watching movies and TV from home is more convenient and cost effective.

If you believe the theater industry will come back, you may want to reconsider that belief. 

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.