AMC Entertainment (NYSE:AMC) is the largest movie theater operator in the world, with exposure across the U.S. and Europe. Yet despite an all-time record box office in 2018, AMC's stock has not responded in kind. It now resides around $14, 35% below the recent high of $21.45 seen in September.
So what's the market's big concern? There are really several, hitting AMC all at once. Here's what investors should look for when the company reports fourth-quarter earnings on Thursday, Feb. 28.
AMC A-List: Dangerous success
The first concern surrounds AMC A-List, the company's subscription-based program in the vein of MoviePass. Unlike MoviePass, which is having severe financial problems, AMC's offering is priced at a more sustainable $19.95 per month. But in 2019, the company is raising the price of A-List to $23.95 in California, Connecticut, Massachusetts, New Jersey, and New York, and to $21.95 in Colorado, Delaware, Florida, Georgia, Illinois, Maryland, Minnesota, Pennsylvania, Virginia, Washington state, and the District of Columbia. Early adopters who enrolled before 2019 at $19.95 can freeze that rate for 12 months.
Despite far exceeding its subscriber targets in the first six months operating the service, A-List is actually one of the big concerns for investors. That's because it is causing AMC's margins to decrease, due to up-front marketing and high customer use in the initial rollout.
But management believes this is a short-term issue, and that the program will become profitable if the average A-Listers moderate their use to 2.5 visits per month. As of the company's last earnings call, management said average monthly use had declined from 3.4 visits to 2.7 visits within a subscriber's first three months. Therefore any commentary around the current A-List use rate would be a key to watch.
A-List subscribers exceeded 600,000 at the end of 2018, so an update on both the current subscriber count and the trajectory after the price increase will also be keys.
Box office roared in 2018 but has flopped so far in 2019
Another likely reason for the company's recent swoon is the dismal 2019 box office. Coming off a record U.S. and Canada box office in 2018, things have reversed since Jan. 1. Through Feb. 22, the box office is down a stunning 30% from this time last year. This has been due to the worst January since 2011, followed by the worst Presidents' Day weekend in 15 years.
Investors should keep their ears open for explanations from management. Likely, it will point to a lack of a Star Wars December release, which occurred each of the past few years. In addition, much of the country had historically low temperatures for a portion of January, which could also garner some of the blame.
With more and more studios about to release their own streaming services, every slow box office month brings concerns that the end of moviegoing is nigh. Management will likely try to refute this, as 2017 also had several dismal months, only to bounce back in 2018. Likely, AMC will instill hope around Captain Marvel coming in March, along with Frozen 2 and Star Wars Episode IX slated for the fourth quarter.
Recliners or debt paydown?
Finally, investors should look for an update on the company's capital allocation priorities. Over the past few years, AMC has invested heavily installing luxury recliner seating across much of its theater footprint. That has required heavy capital expenditures, even though the company's debt levels are quite high.
Management had maintained that the returns on investment from recliner seating far exceed its debt interest rate. But with interest rates on the rise, and with the company coming to the end of its recliner investment cycle, AMC may choose to dial back on recliner investment in favor of paying down debt, if not this year, then perhaps next. The company's first large debt maturity occurs in 2022, so paying down debt isn't urgent, but with over $5.3 billion in total debt obligations -- over $1.2 billion of which comes due in 2022 -- management should probably unveil its thinking on the capital structure for 2019 and 2020.
Multiple concerns, but a cheap stock
AMC's debt load and industry headwinds have brought the company's ratio of enterprise value to EBITDA down to just 7.25, well below rival Cinemark at 8.3 times. The keys for AMC's turnaround will be the success of A-List, a better box office, and clarity on its plan to pay down debt (or not). These are what investors should look for on Thursday.