To The Moon

Summary

• AMC Entertainment's stock-price momentum is resurging, and the release of the Taylor Swift movie could generate positive headlines.

• Long-term investors should monitor earnings growth and free cash flow trends which are currently poor.

• AMC's liquidity position and high debt levels are concerning, and the company needs to show sustained operating cash flow improvement for a sustainable turnaround.

• I outline a bullish late-year play on AMC with key price levels to watch.

Opening Night of Taylor Swift | The Eras Tour

Kevin Winter/Getty Images Entertainment

AMC Entertainment (NYSE:AMC $AMC Entertainment(AMC)$ ) will be back in the news later this week when Taylor Swift’s Eras Tour concert film hits the big screen on October 13. In late August, AMC’s ticket sales record was shattered in less than 24 hours after the movie was announced.

I have a near-term buy rating on AMC given a stock-price momentum resurgence, positive headline potential due to the Swift movie, and the possibility of improved earnings news in less than a month.

Long-term investors still want to see a string of positive quarters with earnings growth and must monitor free cash flow trends. I also outline key price levels to watch during what is often a volatile Q4 for AMC shares.

Swifties Breaking Box Office Records Already

Swifties Breaking Box Office Records Already

CNN

But, as Torsten Sløk points out, "The number of people going to the movies has in recent weeks slowed down more than the usual seasonal pattern."

Fewer Movie Date Nights As Consumer Faces Headwinds

Fewer Movie Date Nights As Consumer Faces Headwinds

Daily Chartbook

The Kansas-based $2.0 billion market cap Movies & Entertainment industry company within the Communication Services sector has negative trailing 12-month GAAP earnings and does not pay a dividend. Ahead of earnings in November, shares trade with an extreme implied volatility percentage of 117% while short interest is also high at 11.2%.

Back in August, AMC reported Q2 non-GAAP earnings that were better than feared. EPS was $0.00, a 4-cent beat, while revenue jumped 16% year-on-year to $1.35 billion, also topping analysts’ targets. Importantly for the firm as a going concern, liquidity was $643 million, with a chunk of that coming from a revolving credit facility that was not yet tapped and cash of $435.3 million. It was a 4-year high in net sales with a double-digit increase in attendance while adjusted EBITDA verified at $182.5 million compared to a consensus estimate of just $153.3 million ($106.7 million in the same quarter a year ago).

Still, free cash flow clocked in near -$62 million, indicating that there remains a significant cash-burn problem. The year-to-date cash burn was already around -$300 million as of the end of the first half. The good news is that with improved sales trends, Q3 could feature a positive free cash flow print for the quarter just ended, given the two major Hollywood blockbusters back in July, and the Taylor Swift Eras Tour movie should propel profitability for the current quarter.

AMC: Sharply Negative Free Cash Flow Since The Pandemic Began

AMC: Sharply Negative Free Cash Flow Since The Pandemic Began

YCharts

I dug into the Q2 earnings conference call, and a few points stood out to me as the firm struggles with its liquidity position. The firm reiterated that it is focused on liquidity and balance sheet management, with efforts to raise equity and retire debt to strengthen its financial position, hence the move to sell shares in September. Furthermore, CEO Adam Aron acknowledged the challenges over the short term, especially related to liquidity issues, while expressing optimism for the company's medium-term prospects and ongoing recovery.

But with a market cap of $2.0 billion, total debt is concerning at $9.5 billion while cash is less than $500 million. AMC's efforts to grow margins through better food and beverage menu options seems like a reach to me as the firm closes some locations and negotiates existing rents with landlords.

On valuation, there is not a whole lot to like about AMC today. A few odd-ball moves by its management team have done little to monetize its assets and bring operating cash flow into the black. While the price-to-sales ratio is low near 0.4, below the sector median of 1.1, and its 5-year average of 1.7 (forward), fundamental and long-term investors really need to see a string of robust operating cash flow quarters to support the thesis that a sustainable turnaround story is unfolding. For now, last month’s equity sale is a bad sign, so I would not own this one for any kind of long-term value case today.

AMC: Q2 Adjusted EBITDA Improvement, But Weak Valuation Metrics Persist

AMC: Q2 Adjusted EBITDA Improvement, But Weak Valuation Metrics Persist

Seeking Alpha

Compared to its peers, AMC features a very poor valuation considering its negative free cash flow position and no imminent prospects for a strong and sustainable positive turn in EPS. Still, the growth rating is marked as solid, but that is simply the result of less negative per-share profits in the out years – not exactly a sanguine situation either. With no profitability and poor momentum in the last year, there’s not a whole lot working for the firm compared to other entertainment companies. I will note later, though, that the stock has rallied in recent weeks while a smattering of earnings upgrades have helped AMC.

Competitor Analysis

Competitor Analysis

Seeking Alpha

With a key event on the horizon, I thought it appropriate to review seasonal trends with AMC. The below image from Equity Clock illustrates that the stock tends to perform poorly over the final few months of the year. I view seasonality as a secondary indicator to broader trends, but this is a bearish data point the bulls hope to shake off.

Two Thumbs Down: Bearish Q4 Seasonal Trends

Two Thumbs Down: Bearish Q4 Seasonal Trends

EquityClock.com

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q3 2023 earnings date of Tuesday, November 7 before the open. The company then hosts a shareholders’ meeting the following day – so be on guard for high volatility that week.

Corporate Event Risk Calendar

Corporate Event Risk Calendar

Wall Street Horizon

The Technical Take

There's bad blood here. Looking back, AMC collapsed from meme-stock mania when it hit a split-adjusted high of $726 (it completed a 1:10 reverse split in late August). With a protracted and severe downtrend off the Q2 2021 high, shares finally found some bottom-picking buyers near $7, about a 99% drawdown. The stock is up 40% since early September, though. I see resistance near $19, and with few shares traded from the current price up to that level, a short-covering rally ahead of and through the Taylor Swift Eras Tour movie period is quite possible.

Long today with a stop under the September low appears to me as a favorable risk/reward play for a small part of an investor’s portfolio. With sky-high volatility, position sizing is key. Notice in the chart below, however, that the long-term 200-day moving average is falling, indicating that the bears are in control, so I do not see this as a prudent long-term value play as of now.

AMC: Air Pocket Up to $19, Shares Bounce Off $7

AMC: Air Pocket Up to $19, Shares Bounce Off $7

Stockcharts.com

The Bottom Line

I have a near-term buy rating on AMC. With high short interest and the potential for a decent quarter having just ended, we could see continued buying as the Swifties pack the theaters later this week.

Source: seeking alpha