Why AMC Entertainment is a Buy Now: A Deep Dive into Valuation, Earnings, and Market Mispricing

AMC Entertainment Holdings Inc. (NYSE: AMC), the world’s largest movie theater chain, has been on a rollercoaster over the past few years, especially with the pandemic wreaking havoc on its operations. However, despite all odds, the company has seen a significant improvement in its earnings, and its stock is now trading at a deep discount to its intrinsic and relative valuations.

Intrinsic value represents the true worth of a company’s stock, determined by its financial health and overall performance. Unlike the stock’s market price, which fluctuates due to market sentiment and investor emotions, intrinsic value provides a more accurate measure of whether a stock is genuinely a good investment.

This article breaks down why AMC’s improved earnings, in conjunction with a strong valuation argument, make the company a buy for investors willing to bet on the rebound of the theatrical industry.

AMC’s Valuation: A Substantial Discount

Based on our analysis, the intrinsic value of AMC’s stock is calculated at $16 per share, compared to its current trading price of $4.23. This means AMC is undervalued by approximately 70%. Moreover, on a relative valuation basis, AMC’s stock is estimated to be worth $25 per share, translating to an even more substantial discount of ~80%.

Intrinsic value is derived by averaging the results of two widely accepted valuation methods: the Discounted Cash Flow (DCF) analysis and relative valuation. Here’s a breakdown of how these methodologies help establish a fair value for AMC.

• Discounted Cash Flow (DCF) Analysis

  The DCF method estimates a company’s future cash flows and discounts them back to present value, giving a precise figure for the company’s intrinsic worth. AMC, despite its volatility, has been improving its cash flow through various cost-cutting measures, refinancing debt, and boosting theater attendance post-pandemic.

  With the gradual recovery of cinema demand, particularly from blockbuster releases and higher per-patron spending on concessions, AMC’s future free cash flow could see substantial growth. Conservatively, these future cash flows suggest that AMC’s intrinsic value stands at $16 per share.

• Relative Valuation

  Relative valuation involves comparing AMC to similar companies based on industry-specific metrics, including EV/Revenue, EV/EBITDA, and P/E ratios. Despite AMC’s unique position in the entertainment space, the company compares favorably to peers when accounting for the rebound in the cinema industry and its high revenue potential.

  For example:

  EV/Revenue: As AMC’s revenue has rebounded strongly post-pandemic, it compares favorably to other theater chains and media companies.

  EV/EBITDA: AMC’s EBITDA has also shown improvement as costs are contained and audience numbers return.

  The relative valuation places AMC’s stock at $25 per share, underscoring the potential for price appreciation in a market recovery scenario.

Intrinsic Value as an Average of DCF and Relative Value

By taking the average of the intrinsic value from the DCF analysis and the relative valuation, we arrive at an overall intrinsic value of $20.50 per share. This implies that AMC stock is trading at a significant discount to its fair value and offers investors a ~70-80% potential upside based on current market conditions.

Earnings Improvement: A Path to Recovery

AMC’s financials have seen remarkable improvement over the past few years, which supports the investment thesis. After navigating through a challenging pandemic-induced downturn, AMC is beginning to show positive momentum, particularly in 2023 and 2024.

• Revenue Growth: AMC’s revenue declined significantly during the pandemic, dropping to as low as $1.2 billion in 2020. However, since theaters reopened, the company has seen a strong recovery. For the fiscal year 2024, revenue is projected to reach $4.5 billion, up from $3.9 billion in 2023, showing a steady upward trajectory. The resurgence of movie-goers, boosted by popular films, has driven higher attendance and increased per-patron spending on concessions.
• Improved EBITDA and Margins: EBITDA margins have improved as AMC has focused on cost efficiency and better financial management. In 2020, AMC posted a negative EBITDA of over $500 million, but by 2023, EBITDA turned positive, and for 2024, it is forecasted to grow to $600 million. This is a significant turnaround, driven by both revenue growth and operational improvements.
• Debt Restructuring: One of the key issues that investors have been wary of is AMC’s debt load. However, the company has made significant strides in addressing this concern by restructuring and refinancing its debt. As of 2024, AMC has reduced its net debt position from over $5.4 billion to $4.6 billion, while also securing more favorable interest rates, which will save the company millions in interest expenses moving forward.
• Diversified Revenue Streams: AMC has also embraced new business opportunities, including partnerships with streaming services and expanding its food and beverage offerings. These initiatives, while still in early stages, could further support long-term growth and help the company adapt to the evolving entertainment landscape.

Catalysts for Future Growth

Several factors could drive AMC’s stock price higher:

• Blockbuster Releases: Major movie releases in 2024 and beyond are expected to bring even more foot traffic to AMC theaters. These blockbuster movies have the potential to boost both ticket sales and concessions.
• Premium Cinema Experience: AMC has invested heavily in its premium theaters, including IMAX and Dolby Cinema. As consumers return to theaters for the superior movie-going experience that can’t be replicated at home, AMC’s revenues from premium formats could see a strong boost.
• Subscription Services: AMC Stubs A-List, AMC’s movie subscription service, has seen a surge in membership. This recurring revenue stream provides a stable base for future earnings growth.

Risks to Consider

While AMC is undervalued from both an intrinsic and relative perspective, potential investors should be mindful of the risks involved:

• High Debt Levels: AMC still carries a significant debt load, which could become a burden if interest rates rise further or if revenue recovery slows down.
• Competition from Streaming: Streaming services continue to pose a threat to traditional theater chains, though AMC has proven its ability to coexist alongside streaming by partnering with major streaming platforms for exclusive releases.

Conclusion: A Buy for Value-Oriented Investors

At its current market price of $4.23, AMC stock is significantly undervalued when compared to its intrinsic value of $16 per share and its relative value of $25 per share. With a 70-80% discount to its fair value, and supported by improving earnings, cost control, and a recovering cinema industry, AMC presents a deep value opportunity for investors willing to weather near-term volatility.

For those with a longer-term outlook, AMC offers substantial upside potential as it continues to recover from the pandemic and capitalize on the return of movie-going audiences.

Disclaimer: The information provided in this analysis is for informational purposes only and should not be considered financial, investment, or trading advice. Always do your own research and consult with a licensed financial advisor before making any investment decisions. The author and publisher are not liable for any financial losses or damages that may result from following the information provided. Investing in stocks involves risks, including the loss of principal.