MKM's Handler Upgrades AMC Entertainment To Buy With 30% Upside Potential, Sees Cinemark As 'Best In Class'

In separate reports published Wednesday, MKM Partners analyst Eric Handler upgraded the rating on AMC Entertainment Holdings Inc AMC to Buy, while raising the price target from $37 to $42. The analyst noted, however, that Cinemark Holdings, Inc. CNK continued to be the best-in-class, while maintaining a Buy rating and a price target of $48.

Analyst Eric Handler said that the upgrade for AMC Entertainment was based on:

• Incremental value from the acquisition of Starplex - The Starplex transaction is expected to add 33 theatres or 350 screens and help diversify AMC Entertainment's portfolio.
• A more “reasonable” valuation after the deal announcement and the 9.5 percent decline in the company’s shares since April 9

Handler cited catalysts for the shares as the expected market share gains from theatre renovations and “a positive three-year content cycle.”

“Our 2H15 forecast assumes 150bps of outperformance for AMC and what could prove a conservative 100bps of outperformance in 2016 and 2017. The coming 2.5 years should see the continued strength of franchise, action titles that play well in AMC's markets,” the MKM Partners report added.

Handler mentioned that the positive investment thesis for Cinemark was based on:

• Expectations for a positive three-year content cycle
• Secular growth opportunities in Latin America
• “An under-levered balance sheet with a rising cash balance, which we believe over time will be utilized to return a greater amount of capital to shareholders.”

For 2Q15, the revenue and adjusted EBITDA estimates were reduced from $800mn to $793mn and from $214mn to $189mn, respectively. The downward revision in the revenue estimate reduction was “entirely Admissions driven” and primarily reflects lower-than-expected domestic box office growth and tough currency headwinds, which likely caused a decline in average ticket prices in Latin America.

The EPS estimates for 2015 and 2016 have been reduced from $2.30 to $2.13 and from $2.64 to $2.62, respectively.