While 2013 was jam packed with hot IPOs that included Potbelly, Sprouts Farmers Market, and of course Twitter, one of the most overlooked public offerings could turn out to be the best long-term investment. A newly public movie theater operator could be one of the most underrated IPOs of 2013. While the theater industry has taken heat over the last five years, thanks to the rise of streaming services and movies on demand, companies in this sector are still cash flow generating machines.
Consumers' loosening purse strings and a potentially strengthening economy mean even more income potential for theaters. AMC Entertainment (NYSE:AMC) completed its IPO in mid-December, and it's only up 12% since then. AMC's also one of the best plays on the market with over 5,000 screens spread across the U.S.
The IMAX (NYSE:IMAX) format has become more entrenched and 3-D movies have become more accepted. Of AMC's some 5,000 screens, over 2,200 are 3-D enabled, and this includes over 135 IMAX 3-D enabled screens. AMC is also the market leader when it comes to IMAX screens, as it has 44% of U.S. market share among all IMAX exhibitors.
Another one of AMC's big initiatives is the revamping of its theaters. The company has gone from stuffing as many people as possible into its theaters to focusing on guests' comfort. Its seats are now plusher--and they recline! As a result, AMC lost nearly two-thirds of its seating capacity at its revamped theaters, but it also saw a nearly 100% jump in attendance at these locations.
Dividends and cash generation are theater staples
The theater industry is known for its cash generating capabilities. AMC's major peers pay healthy dividends. Regal Entertainment (NYSE:RGC) pays out a 4.3% dividend yield and Cinemark (NYSE:CNK) pays out a 3% yield. With AMC's strong cash flow and cash position, it could easily pay out an impressive dividend to shareholders as well. AMC has over 20% of its market cap covered by cash and its operating cash flow yield is over 18%. If AMC did decide to pay out as much of its earnings as its peers do, it would offer investors a nice 3%-4% dividend yield.
AMC trades as the cheapest among the major theater operators on an EV/sales basis, trading at 1.3 times, while Regal trades at 1.7 times, Cinemark 2 times and Carmike 1.5 times. Assuming that AMC should at least trade in-line with Carmike at 1.5 EV/sales, the fair value for AMC should be over $25.
The thing to remember about Cinemark is that it has impressive prospects beyond the U.S. While AMC and Regal operate primarily in North America, Cinemark has turned to Latin America to drive its future growth. Cinemark has 167 of its 465 theaters located in Latin America.
All in all, investing in IPOs can be a dangerous game. This is in part because their share prices are unjustifiably bid higher, only to come sliding down after a few months. Well, that's not the case with AMC. The company had a minor pop after the IPO, but there's still plenty of upside. AMC is still underfollowed by analysts and it's trading at a relatively cheap valuation in comparison to other major theaters. It's also worth noting that billionaire Ken Griffin's hedge fund, Citadel Investment Group, snatched a 7.7% stake in AMC shortly after it went public. Maybe it's time you did the same.