I want to like AMC Entertainment Holdings (NYSE ticker: AMC). But the company’s financial situation is a mess. In the past 12 months, AMC’s loss from continuing operations amounted to $820 million. In addition, AMC has a net debt position of approximately $9.5 billion, There is no balance sheet strong enough to continue absorbing such large losses.
However, I think it’s too early to write off any value from the world’s largest movie theater chain, as 2023 could offer some upside on the back of a strong movie distribution pipeline. Personally, I value AMC at $4.07 per share, assuming a successful turnaround in the movie theater industry. But given the risks and uncertainties, the stock is currently a “hold.”
For reference, AMC stock has lost about 504% over the past 12 months, compared to a loss of about 11.5% in 2018 S&P 500 Index (spy).
AMC’s finances are a mess
Even though AMC shares are down more than 90% from their all-time highs, it’s hard to argue that the company offers value to investors. Looking at AMC’s trailing 12-month income statement, I’d like to point out that AMC incurred an operating loss of $279 million on revenue of approximately $3.7 billion.
It’s worth noting that if analysts also factored in AMC’s interest payments — which are certainly a real cost to the company and shareholders — then AMC’s loss would expand to $820 million. However, it’s worth highlighting that this trend is showing positive traction: AMC’s losses from continuing operations narrowed compared to 2021 (-$1.3 billion). Compared with 2020 (-$4.6 billion), losses in 2021 have narrowed considerably.
However, if AMC hopes to survive financially, the company needs to write black numbers as soon as possible, because AMC’s balance sheet is not strong enough to continue absorbing losses. As of late September 2022, AMC recorded “only” $684 million in cash and cash equivalents on its balance sheet, while total financial debt was $10.2 billion (net debt was approximately $9.5 billion).
With this frame of reference, investors should also consider that the company’s financing options are limited due to the company’s history of losses combined with frozen capital markets. Even if AMC were able to raise capital through equity underwriting, shareholders would face severe dilution, with a reference market capitalization of approximately $2.8 billion.
2023 could bring upside
Hopes for AMC’s turnaround rest firmly on improvements in 2023. Against the backdrop of a strong movie distribution pipeline, the company’s CEO has expressed confidence heading into the new year.
Looking back at CEO Allen’s statement, “movie viewing” is indeed still around a third below pre-pandemic levels. In fact, cumulative global box office spending will be approximately $7.4 billion in 2022, compared to $11.4 billion in 2019 (a difference of 38%). However, with $2.1 billion in 2020, $4.5 billion in 2021, and $7.4 billion in 2022, the trend is clearly upward.
Investors should also consider that 2023 offers an exceptionally strong pipeline of blockbuster movies. Key releases include:
- Ant-Man and the Wasp: Quantum Fever (2022)
- Tenet III (2023)
- Scream VI (2023)
- Indiana Jones and the Wheel of Fortune (2023)
- Dune: Part Two (2023)
- The Hunger Games: A Song of Songbirds and Snakes (2023)
- Dungeons & Dragons: Glory Among Thieves (2023)
- John Wick: Chapter 4 (2023)
- Guardians of the Galaxy Vol. 3 (2023)
- Fast X (2023)
- Spider-Man: Into the Spider-Verse (2023)
- Transformers: Rise of the Beasts (2023)
- Mission: Impossible – Dead Reckoning, Part 1 (2023)
So it doesn’t seem entirely unreasonable to me that 2023 box office receipts will return to pre-pandemic levels of over $11 billion.
residual income model
Valuing AMC is certainly difficult given the financial risk factor and the still-soft market for movie theater spending. But assuming AMC turns things around, here’s how I value AMC stock.
To estimate a company’s fair implied valuation, I’m a big fan of applying residual income models, which are based on the idea that valuation should equal the discounted future earnings of the business after capital expenditures are deducted. According to CFA Institute:
Conceptually, residual income is net income less expenses (deductions) for the opportunity cost of generating net income for common stockholders. It is the remaining or residual income after taking into account all capital costs of the company.
Regarding my AMC stock valuation model, I make the following assumptions:
- For EPS forecasting, I’m sticking to analysts’ consensus forecasts through 2025 on the Bloomberg terminal. In my opinion, any estimates beyond 2025 are too speculative to fit into a valuation framework. But for 2-3 years, the analyst consensus is usually pretty accurate.
- To estimate capital expenditures, I set AMC’s cost of equity at 10%.
- For the terminal growth rate after 2025, I use a proud 3%, which is roughly double the estimated long-term nominal GDP growth rate (to reflect strong growth tailwinds until at least 2030).
Given these assumptions, I calculate a base price target for AMC of around $4.07/share.
Therefore, the value of AMC has not been underestimated. However, my modeling shows that AMC’s fair-implied share price is very sensitive to changes in discounts and terminal growth rates. To test various assumptions about AMC’s cost of equity and terminal growth rate, I construct a sensitivity table.
AMC has been struggling financially, posting an $820 million loss from continuing operations over the past 12 months. This is concerning because AMC doesn’t have a balance sheet strong enough to continue absorbing such large losses, given its net debt position of approximately $9.5 billion. However, I think it’s too early to offset any value from AMC, as 2023 could offer some upside on the back of a strong movie distribution pipeline.