Why AMC Entertainment Is up Nearly 20% Since Its IPO

Since its IPO in December of 2013, AMC Entertainment (AMC 9.76%) has outperformed rivals Regal Entertainment (NYSE: RGC) and Cinemark (CNK 2.46%) on the stock market. Year-to-date, AMC Entertainment has remained the best of class, doubling the total return of Regal Entertainment while crushing Cinemark, which has remained mostly flat in 2014.

Despite increased competition and the fact that fewer Americans go to the movies each year due to a variety of reasons which include improved home entertainment options, the three biggest theater exhibitors continue to thrive.

Nevertheless, what makes AMC Entertainment different from its peers, and why is its stock up nearly 20% since its IPO?

Credit: m01229, via Wikimedia Commons

AMC Entertainment's first quarter against those of its biggest rivals
The stories for the industry's big three follow similar patterns when it comes to admissions, food and beverage, and total revenue growth, as shown below.

Credits: AMC Entertainment, Regal Entertainment, and Cinemark first-quarter fiscal 2014 filings.

Looking at the revenue growth summaries above, AMC Entertainment actually experienced the least growth in both admission revenue and food and beverage revenue. Furthermore, the company also suffered the largest net loss during the quarter at $4.5 million mainly as a result of expansion, innovation, and operating cost increases.

Therefore, at first glance, AMC Entertainment doesn't appear to deserve its recent stock gains in comparison with its peers. However, things become clearer when we look at the relative sizes of the three theater exhibition companies and the average revenue per theater patron numbers.

AMC Entertainment currently holds an industry-leading food and beverage per patron average of $4.05. Regal Entertainment and Cinemark come in at $3.64 and $3.14, respectively. Cinemark's average comes down considerably due to its presence abroad in South America.

Additionally, AMC Entertainment's theaters are currently in 24 of the top 25 US markets and this includes theaters in the cities of New York, Los Angeles, and Chicago.

With 45% of the US market share of IMAX screens, AMC Entertainment is able to garner average ticket prices much higher than the industry average of $8.13 . Current ticket prices for AMC Entertainment run between $8.79 and $14.76.

Lastly, since AMC Entertainment has just 4,945 screens in the US versus Regal Entertainment's 7,381 screens and Cinemark's 5,595 screens, AMC shows that bigger isn't always better.

AMC Entertainment not only beat its peers, it also beat the S&P 500 index year-to-date. Credit: Google Finance

Positives going forward for AMC Entertainment
Can AMC Entertainment's stock keep climbing? Well, it has a lot going for it.

First, AMC Entertainment continues to lead the industry in innovation and has been first-to-market with several concepts. While AMC Entertainment is already developing second generation reclining seats for upcoming renovations that are expected to require auditoriums to give up only half of their capacity instead of up to 70% like they do currently, Regal Entertainment just started to reseat its theaters. Regal Entertainment plans to complete the process for 25 theaters by the end of this fiscal year.

AMC Entertainment's dine-in and reseating programs have been huge positives overall. As a result, it has been able to generate industry-leading admissions and its AMC Stubs loyalty program continues to grow its core customer base, which climbed 21.1% this past quarter.

Concessions are also becoming an attraction of their own with 70% of patrons now purchasing food and beverages, up from 66% at this point last year.

While AMC Entertainment currently enjoys its position as the biggest exhibitor of IMAX screens, it is already moving ahead on its own private label large format AMC Prime concept which may eventually become the standard for the company in the future. Because it won't need to share the theater proceeds with IMAX, it will be able to take in a larger cut of the profit from Prime tickets which currently go for $14.15 on average.

Lastly, 2015 and 2016 are looking promising for all three theater companies when it comes to movie releases. Avengers 2, Bond 24, The Hunger Games: Mockingjay Part 2, and Star Wars Episode VII top the list in 2015 while Avatar 2, Captain America 3, Superman vs. Batman, and X-Men Apocalypse are currently on deck for 2016.

AMC's recliner reseat program has resulted in average attendance up 87% despite the 64% loss is seating capacity. Credit: AMC Entertainment

Potential obstacles for AMC Entertainment and its peers
AMC Entertainment will continue to reinvest in itself, and as a result its quarterly bottom lines may remain negative, at least in the near term.

The one advantage AMC Entertainment does have over its peers is its much smaller relative size in terms of locations and screens. Regal Entertainment will have to shell out the most money since it has 7,381 screens and plans to add over 200 screens annually according to its stated long-term goals .

But this brings us back to the issue of what happens when rivals catch up to AMC Entertainment on amenities and concession options. As the differentiation gap narrows, AMC Entertainment may need to either find other areas to innovate or find ways for its admissions and food and beverage revenue to grow faster than those of its peers.

While AMC Entertainment has its AMC Prime premium screen concept, Regal Entertainment already has RPX across 67 screens and Cinemark has NextGen on 205 screens .

Then there is the industry's overall heavy reliance on movie studios to produce blockbuster movies each year. The next couple of years are somewhat of a rare treat due to anticipated sequels derived from current blockbuster franchises. But what happens beyond 2016?

The six major studios released just 114 movies in 2013, a huge drop from the 204 films they released in 2006 . Therefore, each film today plays a larger part in the success or failure of theater exhibitors.

Finally, the trend of fewer Americans going to the movies annually is a big burden on all of those involved in the movie industry. Shopping trends and the popularity of online shopping keep impulse moviegoers away from malls and theater locations. In-home technology like streaming entertainment and on-demand media outlets also threaten the industry.

Number of tickets sold fell 11% between 2004 and 2013 while revenues rose 17%.  2014 data is annualized.  Credit: The-Numbers

And while annual revenues continue to increase, the question arises as to whether companies are approaching a price point that is near the limit that customers are willing to pay. This could be especially bad for AMC Entertainment since premium price points have been key to its recent success.

Bottom line
The key takeaway is that we can't rely on blockbuster releases each quarter. Instead we need to focus on which theater companies will attract the most guests and collect the most money per patron even when blockbusters are few and far between.

Right now AMC Entertainment has been able to reap huge rewards by being first-to-market on many theater amenity upgrades even though it is much smaller than Regal Entertainment and Cinemark. Even though long-term trends point to a gradual decrease in admission tickets sold annually, movie theaters can stay successful in overall terms if they can make going to the movies worth the higher prices.