This New IPO Is a Great Way to Stay Entertained

The IPO market can overheat at times, but this movie stock looks like a good long-term bet.

Jan 19, 2014 at 9:47AM

While 2013 was jam packed with hot IPOs that included Potbelly, Sprouts Farmers Market, and of course Twitter, one of the most overlooked public offerings could turn out to be the best long-term investment. A newly public movie theater operator could be one of the most underrated IPOs of 2013. While the theater industry has taken heat over the last five years, thanks to the rise of streaming services and movies on demand, companies in this sector are still cash flow generating machines.

Consumers' loosening purse strings and a potentially strengthening economy mean even more income potential for theaters. AMC Entertainment (NYSE:AMC) completed its IPO in mid-December, and it's only up 12% since then. AMC's also one of the best plays on the market with over 5,000 screens spread across the U.S.

The IMAX (NYSE:IMAX) format has become more entrenched and 3-D movies have become more accepted. Of AMC's some 5,000 screens, over 2,200 are 3-D enabled, and this includes over 135 IMAX 3-D enabled screens. AMC is also the market leader when it comes to IMAX screens, as it has 44% of U.S. market share among all IMAX exhibitors. 

Another one of AMC's big initiatives is the revamping of its theaters. The company has gone from stuffing as many people as possible into its theaters to focusing on guests' comfort. Its seats are now plusher--and they recline! As a result, AMC lost nearly two-thirds of its seating capacity at its revamped theaters, but it also saw a nearly 100% jump in attendance at these locations. 

Dividends and cash generation are theater staples
The theater industry is known for its cash generating capabilities. AMC's major peers pay healthy dividends. Regal Entertainment (NYSE:RGC) pays out a 4.3% dividend yield and Cinemark (NYSE:CNK) pays out a 3% yield. With AMC's strong cash flow and cash position, it could easily pay out an impressive dividend to shareholders as well. AMC has over 20% of its market cap covered by cash and its operating cash flow yield is over 18%. If AMC did decide to pay out as much of its earnings as its peers do, it would offer investors a nice 3%-4% dividend yield.

AMC trades as the cheapest among the major theater operators on an EV/sales basis, trading at 1.3 times, while Regal trades at 1.7 times, Cinemark 2 times and Carmike 1.5 times. Assuming that AMC should at least trade in-line with Carmike at 1.5 EV/sales, the fair value for AMC should be over $25.

The thing to remember about Cinemark is that it has impressive prospects beyond the U.S. While AMC and Regal operate primarily in North America, Cinemark has turned to Latin America to drive its future growth. Cinemark has 167 of its 465 theaters located in Latin America.

Bottom line
All in all, investing in IPOs can be a dangerous game. This is in part because their share prices are unjustifiably bid higher, only to come sliding down after a few months. Well, that's not the case with AMC. The company had a minor pop after the IPO, but there's still plenty of upside. AMC is still underfollowed by analysts and it's trading at a relatively cheap valuation in comparison to other major theaters. It's also worth noting that billionaire Ken Griffin's hedge fund, Citadel Investment Group, snatched a 7.7% stake in AMC shortly after it went public. Maybe it's time you did the same.

What is the Fool watching in 2014?
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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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