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Better Buy: Disney vs. AMC

By Lawrence Rothman, CFA - Aug 12, 2020 at 11:00AM

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Should you turn to a blue chip company or a potential turnaround situation?

Both Walt Disney (DIS 4.68%) and AMC Entertainment (AMC 7.56%) have seen their operations affected by government actions to control the coronavirus' spread. This includes forcing public places, like movie theaters and theme parks, to close.

Earlier this year, the National Bureau of Economic Research officially declared that the U.S. economy was in a recession, and other countries are in the same boat.

The challenging economic environment puts pressure on consumer spending. Nonetheless, one company stands head and shoulders above the other and is clearly the better long-term investment.

Someone looking at a graph with "Sell" and a down arrow on one side and "Buy" and an up arrow on the other side.

Image source: Getty Images.

Does Disney still have the magic?

Naturally, recent results weakened versus a year ago. In its fiscal third quarter (ended June 27), revenue fell by 42% from $20.3 billion to $11.8 billion. Meanwhile, Disney's adjusted diluted earnings per share were down 94% from $1.34 to $0.08.

Despite rallying since March, Disney's stock is down about 12% since the start of the year. But I am optimistic about the company's prospects.

For starters, after launching the subscription service Disney+ last November, there are 57.5 million paid subscribers, and more than 100 million when including ESPN+ and Hulu. Disney+ service, which includes strong content from Disney, Pixar, Marvel, and Star Wars properties, should continue to do well.

It recently aired Hamilton and announced it would release the live-action version of Mulan on its service for a $29.99 charge. With strong content, attractive price points, and quick releases on its streaming service, this will help boost Disney's business until the economy improves.

Remember: This is a media empire with networks like ABC and ESPN, theme parks throughout the world, and studios such as Disney, Twenty-First Century Fox, Marvel, and Pixar with proven records of producing strong content.

Can AMC turn things around?

AMC's second-quarter results were dismal, with revenue plummeting by about 99% versus a year ago to about $19 million. Its bottom line was wiped out, with an adjusted diluted loss per share of $5.44 compared with year-ago earnings of $0.08.

But there's more going on with the company than people staying out of theaters due to COVID-19. After feuding with Comcast's (CMCSA 1.13%) Universal Pictures over its plans to release movies faster to premium video-on-demand platforms (VOD), the two companies recently made peace. Under the arrangement, AMC's exclusivity window will narrow, but it will share in the VOD profits. If other studios follow suit, this should protect AMC's revenue after the movie opens and allow the company a piece of the VOD pie. But that's a big "if."

AMC also has a lot of debt after averting bankruptcy over the last few months through various deals. Earlier this month, management worked out an agreement with certain lenders to exchange their holdings for more secured debt. At the end of the quarter, the company had $5.5 billion of debt and about $500 million in cash.

Following the restructuring, it lowered its debt by around $550 million.

Nonetheless, while the company has a little more wiggle room, its debt burden remains heavy.

The winner

AMC deserves kudos for not sitting still as streaming becomes more popular. It's just that with a pile of debt and uncertainty as to how much revenue it can retain in a world turning increasingly to streaming, I'd sit on the sidelines.

On the other hand, Disney's strong assets make this the better company to own over the long haul.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
$117.69 (4.68%) $5.26
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$25.46 (7.56%) $1.79
Comcast Corporation Stock Quote
Comcast Corporation
$39.40 (1.13%) $0.44

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