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Why Rising Inflation Is Great News for AMC Entertainment Stock

By Parkev Tatevosian, CFA – Aug 31, 2021 at 7:52AM

Key Points

  • Higher consumer prices can help offset high fixed expenses.
  • The BLS reported consumer prices rose by 5.4% in the last 12 months.
  • AMC's stock price is up nearly 2,000% this year.

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The theater chain can raise prices for goods and services without losing too many customers.

Inflation is a concise term representing the measurement of price changes over time. The coronavirus pandemic caused mass disruption in supply chains and changed customer behavior, affecting prices. Those changes have been felt over the past 18 months in the prices that people pay for many products and services. 

The U.S. Bureau of Labor Statistics reported that prices for all consumer goods rose on average by 5.4% over the last 12 months. Because it's an average, prices for some items may have increased more than others. For businesses with a high level of fixed costs, rising prices can actually be a good thing. Most of their costs stay the same (fixed) while they can start to raise prices on the products or services they are selling. And because price increases are felt broadly, they are less likely to lose customers when they increase their prices.

A man and a child watching a film in a theater.

Image source: Getty Images.

That's the scenario AMC Entertainment Group (AMC -2.69%) finds itself in. The company has high fixed costs, so those costs will remain steady while it can start to raise prices on its products and services.  

Customers don't seem to mind the higher prices, yet

AMC's fixed costs were burdensome during the pandemic when business came to a halt. Now that nearly all of its theaters are open and viewers are coming back, it can reap some benefits from its fixed cost base. The bulk of AMC's fixed costs are in the form of rent and interest expenses. Over the last six months, they totaled $398 million and $240 million, respectively.

AMC management has likely observed rising consumer prices and thought it wise to raise their own prices as well. Indeed, CEO Adam Aron said this during the company's most recent conference call: "We've also noticed that there's appeared to be little price resistance to the increased prices currently being charged at our U.S. theaters. So just last week, we imposed an approximate 5% admissions ticket price increase at many of our U.S. theaters."

Already, increasing prices are showing up in the company's results. Average ticket prices in the first six months of 2021 increased to $10.48 from $9.39 last year. The revenue boost it provides will go some way toward helping the company recover from the devastating effect the pandemic had on its business.

Investor takeaway

Still, the company has a long road ahead to recovery. While helpful in rising price conditions, the fixed expenses mentioned above are burdensome unless revenue can outpace them. Granted, the company is still operating in a limited capacity and somewhat constrained by the pandemic, but revenue in the last six months was $593 million. That's less than the $638 million that was needed for rent and interest expenses. 

AMC is headed in the right direction. As more people are vaccinated and studios bring blockbusters back to the big screen, the theater chain might again reach revenue levels not seen since before the outbreak. It will certainly be assisted in that path if consumer prices continue to rise.

While it would be good news for the stock, it needs much more to make it a good value investment. The stock price is up nearly 2,000% this year, ahead of the company's recovery from the pandemic. That means most, if not all, of the company's growth prospects over the next several years, are already priced into the stock. If you are interested in buying the stock, it would be prudent to wait for a significant pullback in the share price or a substantial improvement in its operating performance.

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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