AMC Entertainment's Numbers Weren't as Good as They Looked

One of the more controvertial sectors over the past year has been movie theater operators, especially market share leader AMC Entertainment (AMC 9.56%). AMC's stock is down over 40% in the past 12 months, as the combination of declining theater attendance and a high debt load has punished the stock severely.

But on AMC's first quarter earnings release, things seemed to be looking up, due to the phenomenal success Black Panther. AMC's revenue grew 8% to $1.38 billion, while total adjusted EBITDA grew an even stronger 10.9% to $277.9 million, and net earnings per share doubled from $0.07 to $0.14 year over year.

For an industry thought to be in decline, these are phenomenal numbers; however, when you peak under the hood a bit, the picture gets a lot more mixed.

Did AMC really grow in the first quarter? Image source: Getty Images.

Watch the pro forma

AMC's numbers grew for a simple reason: the company acquired Nordic Cinemas in the year-ago quarter, and that acquisition accounted for basically all of this quarter's growth. Revenue and adjusted  EBITDA increased only slightly when factoring in Nordic results from a year ago (or, on a pro forma basis), and factoring in currency changes, sales and profits actually declined (about 30% of AMC's operations are in Europe).

Data source: AMC Entertainment Q1 2018 CFO Commentary. Table by author.

In addition to constant currency revenue declines, traffic declines were even worse, though largely offset by increased ticket prices.

Data source: AMC Entertainment Q1 2018 CFO Commentary. Table by author.

Savvy investors may find these numbers troubling, but hold the movie phone! Here are a few reasons not to panic just yet.

Tough comps

First, the film industry was lapping an all-time record first quarter last year. Last year's live-action Beauty and the Beast was a massive hit, and outperformed Black Panther in Europe. According to CEO Adam Aaron, before Black Panther broke out, industry experts were forecasting double-digit box office declines, but the U.S. box office wound up only down (2.6%), and AMC outperformed that, with only a 1% decline.

Upgrades take work

In addition, negative traffic in Europe was at least partly caused by the closure of several large theaters, where AMC is installing its trademark luxury recliner seating. The biggest example was London's 2,000- seat Leicester Square theater, which the company closed down in mid-January, and which will remain closed for about 10 months.

Aaron also said the first recliner renovations in Europe (accompanied by alcohol amenities and premium large formats) were earning well in excess of the company's 25% return on investment threshold. So, while there may be short-term pain, AMC should see long-term gain. 

Costs coming down

Even if revenue were to stagnate or decline, AMC's costs are also coming down. Due to the acquisition of the Carmike Cinema chain back in 2016, AMC is now the largest U.S. cinema chain, and has been able to negotiate favorable film costs from studios. This quarter, film rent costs decreased 4.8% to 52.3% of U.S. admissions, down from 54.4% a year ago.

AMC was also able to negotiate a lower lease on one of its theaters, leading to savings of $24 million in the quarter. At the current moment, many traffic-generating retailers (theaters included), are getting rent concessions from commercial landlords due to lower mall traffic, and AMC has leases that regularly come up for renewal across its hundreds of theaters, so it's possible there could be more savings coming on that front as well.

Going forward

Not only does the company have these positives going for it, but just as last year's first quarter was a tough comparison, the upcoming second and third quarters get much easier as last year's summer box office was nothing short of disastrous. The success of Avengers: Infinity War has already set a record April box office of over $1 billion (the first $1 billion April ever), up 25.7% over last year! That's brought the domestic box office up 4.4% year to date, and the summer film slate looks good as well, with upcoming franchise films Deadpool 2, Solo: A Star Wars Story, and Mission Impossible--Fallout all coming down the pike.

Still, AMC's stock isn't getting any love from investors, as the long-term concerns over movie-going remain. 2017 saw a 25-year low in movie-going, yet the box office was the third-highest in history, due to ticket price hikes and more premium offerings.

An investment in AMC really depends on your long-term outlook for movie-going. If you think streaming will cause movie going to fall off a cliff, I'd stay away. But if the movie industry experiences flat or even modest declines in traffic, there are a lot of positives here, as movie theaters -- and especially AMC -- look like very cheap stocks. I'm personally with the value investors who think AMC is a turnaround pick for 2018.