Even though AMC Entertainment Holding's (AMC -0.67%) second-quarter earnings report handily beat analyst expectations, the theater owner's stock fell, continuing the downward trend experienced over the summer. AMC's business is looking better than it was, but even with the lower share price, it's still no reason investors should jump in.
AMC is not about to go under, and there are good reasons the theater operator can survive. But investors need to remember that valuation matters, and the elevated levels the theater chain continues to trade at are not based upon its fundamentals or those of the industry. So let's look at why AMC Entertainment can still survive, though maybe not thrive.
Returning to form
After industry peers Cinemark Holdings and Imax beat Wall Street forecasts last month, it was a good bet AMC would follow suit. Despite a number of blockbuster films being released to streaming services on the same day as they were available in theaters during the quarter, people were still going to the cinema to watch them.
Traffic wasn't as great as it was before the pandemic, not least because the COVID-19 vaccines were still rolling out to wide swaths of the public and there seemed to remain a latent hesitancy about being in enclosed spaces with crowds. But it's clear many people do want the big-screen experience.
As the largest theater chain operator, AMC had more opportunities to deliver that experience to moviegoers than its competitors, so generating more revenue was probable. It's still producing considerable losses (some $344 million worth, or $0.71 per share), but it was better than the $0.93 loss per share analysts predicted.
CEO Adam Aron says, "AMC is stronger today than it has been at any point since the pandemic forced the closure of all our theaters in March of 2020." He says the financial maneuvers it's taken allowed the company to end the quarter with $2 billion worth of liquidity, double what it ended the first quarter with, which is a new record for the theater chain.
That points to AMC being able to weather the coming months, if not the next few years, until the industry is back on solid footing.
Closing a window on the past
That could actually happen more quickly as simultaneously releasing films to streaming services and theaters is not the big success studios were hoping for. And after Black Widow star Scarlett Johannson sued Disney, claiming they deprived her of money she would have earned from the theaters (she's only entitled to a percentage of revenue earned at the box office), so-called day-and-date releases might become exceptionally rare.
Indeed, AMC just signed an agreement with AT&T's (T 0.75%) Warner Bros. studio to guarantee a 45-day window of exclusivity with the theater chain. The studio had previously signed similar agreements with Cinemark and Regal Cinema owner Cineworld Group.
While the studio has maintained the 2021 simultaneous-release schedule was always a one-off event necessitated by the pandemic, guaranteeing a substantial period of exclusivity shows the importance still assigned to theaters for helping them realize the most revenue for a film.
Moreover, the 17-day guarantee the theater operators hammered out with Comcast's (CMCSA 0.30%) Universal Pictures last year might not last, either, if stars feel that this very narrow window unduly affects the percentage they earn off a film.
A new way to do business
It's apparent the pandemic ushered in new thinking at AMC, or at least spurred it to pursue other channels beyond just projecting a movie onto a screen. Streaming live sporting events is one avenue AMC would like to expand upon, as is streaming Broadway musicals.
I cannot even count the number of times already that our shareholders have asked us to reach out and partner with GameStop. We're on the case. More to come.
AMC has openly embraced its meme stock status along with the investors who have rallied around it. In fact, only one Wall Street analyst was allowed to ask a question on the earnings conference call; every other question came from shareholders who submitted them through Say Technologies, a special platform that connects companies with their investors (and which Robinhood just announced it was buying).
Yet AMC still needs people coming to the theater, and Aron couldn't predict when it would return to form. He noted the industry box office was around $11 billion annually for the five years prior to the pandemic, and he says AMC could be healthy and profitable with a $9 billion to $10 billion box office. But he failed to point out box office receipts have been stable because of steadily rising ticket prices. Theater attendance remains in decline, and higher prices will only hasten the exodus of moviegoers.
Even with the agreements reached with studios, streaming is an ever-present threat that is likely to grow. Aron's ideas may help, but they are still far in the future.
A good business, but a bad stock
At least AMC is acting entrepreneurial. That in itself is a healthy sign and should help the movie theater chain survive. But I won't be buying in at these prices.
The stock goes for 14 times sales, and its enterprise value trades at over 63 times earnings before interest and taxes and 17 times EBITDA. In comparison, Cinemark's enterprise value is a more reasonable 14 times EBIT and 27 times EBITDA.
I like AMC's chances for survival because of management's fresh thinking, but its stock has plenty of air beneath it before it can be considered a viable investment candidate. Investors should be prepared for it to eventually revisit new lows.