Tuesday's Top Upgrades (and Downgrades)

Analysts shift stance on AMC Networks, AMC Entertainment, and Cinemark.

Mar 18, 2014 at 1:35PM

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, our headlines give us a great chance to remind readers that there's a difference between AMC Networks (NASDAQ:AMCX) and AMC Entertainment (NYSE:AMC) -- and what that difference is -- while in a continuation of the theme, we'll also get a chance to take a glance at Cinemark (NYSE:CNK). Without further ado...

AMC Networks, the cable network
Companies with too-similar names (Sysco and Cisco or, more recently, Twitter and TWTR Inc.), have a way of confusing small investors. Today, we want to thank analysts at Maxim Group (who just upped their price target on AMC Networks) and at FBR Capital (who just upped their price target on AMC Entertainment) for giving us a chance to lay out the two stocks side by side and explain the differences.

Simply put, one of these companies is a movie theater chain, now owned by China. The other is a television network that brings us shows like The Walking Dead and Mad Men. AMC Networks is the latter.

This morning, Maxim Group increased its price target on AMC Networks from $84 to $90. The analyst was already recommending buying the stock, but now it seems Maxim likes AMC Networks even more -- and it's not alone. Last week, we saw analysts at Bernstein make a similar move, upping their price target to $93 in response to strong Q4 results and a belief that the company will continue to grow earnings by syndicating its popular original content on other channels.

Investors had better hope the analysts are right, though, because it's priced at 19 times trailing earnings. But with a projected growth rate of only 18% annually over the next five years, AMC Networks stock is starting to look a bit pricey. Meanwhile, this formerly rich cash producer has taken a turn toward producing red ink on its cash flow statement, which now shows negative free cash flow of nearly $74 million over the past 12 months.

Long story short, I'm a great fan of AMC's serialized horror show The Walking Dead, but AMCX stock is also starting to look like a bit of a disaster.

AMC Entertainment, the movie theater chain
Moving on now to AMC Networks' doppelganger: AMC Entertainment also saw its price target lifted today, this time by FBR Capital. As related on StreetInsider.com, FBR started today's note on an off note, warning that the "1Q14 domestic industry box office ... will grow 7% year over year, versus our former assumption of up 12%." That doesn't sound like such great news for a movie theater company.

However, FBR predicts that AMC Entertainment will "outperform the industry in box office per-screen growth" by about "150 bps in 1Q14." Meanwhile, the analyst expects to see net loss carry-forwards benefit the company on the bottom line (by reducing income taxes).

All of this adds up to a new $29 price target on the stock, in FBR's opinion, and a reiterated "outperform" rating. But does AMC Entertainment deserve it?

I don't think so. Priced at 25 times trailing free cash flow, this movie theater chain would have to show strong, double-digit growth rates going forward in order to deserve even its current valuation -- much less the $29 target price FBR is assigning. But while analysts who follow the stock all appear to be projecting 48% annualized earnings growth, I personally don't see how that could occur in the slow-growth movie theater industry.

Cinemark, the other movie theater chain
Why not? Well, consider the example of Cinemark, AMC's rival, and a stock that FBR decided to cut its price target on this morning (to $36). Most analysts think Cinemark will grow earnings at only 15% annually over the next five years -- a respectable growth rate, to be sure, but a far cry from the "48% growth" number being bandied about for AMC Entertainment. Now, maybe AMC Entertainment is a better business than Cinemark. But is it three times better? (Hint: I don't think so.)

FBR warns that weak Q1 box office receipts at Cinemark, combined with foreign exchange rate earnings from the company's international operations, will create a headwind for the company's profits this quarter.

Cinemark is priced similarly to AMC Entertainment, selling for 23 times GAAP earnings. Its free cash flow, however, is notably weaker at only $50 million (about half the cash profits at AMC Entertainment). As a result, Cinemark sells for a steep 68 times free cash flow. Given the valuation, FBR is clearly right about Cinemark stock being a worse bargain than AMC Entertainment. But I think it's a difference of degrees only: Cinemark is a horrible stock, but AMC Entertainment, while less horrible, still is not a good buy.

In short: I wouldn't buy either one of them.

Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case in point: The Motley Fool still recommends AMC Networks.

 

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