Why AMC Is The 'Riskier' Investment In Movie Theaters: 'Fundamentals Are Nowhere Near Where Shares Are Trading'

Macquarie Capital Managing Director and Senior Analyst Chad Beynon on Wednesday downgraded AMC Entertainment Holdings Inc. AMC from Neutral to Underperform and maintained a $6 price target.

The Logic Behind The Downgrade: In a new note, Beynon observed that U.S. theatrical box office performance has yet to recover its pre-pandemic levels. While expressing confidence in the theater chains IMAX Corp. IMAX and Cinemark Holdings Inc. CNK, Beynon had less enthusiasm for AMC’s prospects in the current market.

“AMC remains a riskier investment, given rent obligations, higher leverage and a difficult margin trajectory following a more normalized recovery,” he said.

Beynon observed AMC’s stock performance is still being “heavily influenced” by retail investors, particularly the members of the WallStreetBets forum on Reddit. He noted this created a conspicuous imbalance “with shares still up ~526% L12M (vs. theatre space +11 % and S&P500 +29%). However, shares are trading at ~58x ’22E cons estimates, whereas we generally see this business trading in the 6-9x EBITDA range.”

He added that while AMC avoided a bankruptcy filing during the COVID-19 pandemic thanks to its ability to raise additional capital and refinance some of its debt, he questioned whether its near-term future was copacetic.

“Looking forward, fundamentals are nowhere near where shares are trading given the company carries deferred rent of $420m (2Q21) in addition to its annual rent expense of $1bn,” he wrote, adding that he could foresee how AMC would generate positive free cash flow until 2023.

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The Competition’s Viability: While downgrading AMC, Beynon hailed IMAX as being “more insulated than peers given recovering trends in China, leading margins and a well-capitalized balance sheet” and maintained an Outperform rating while adding a dollar to raise its target price to $26.

With Cinemark, Beynon ranked it as “a close #2, given its superior balance sheet (we’re projecting 3.3x YE22 leverage), superior margins (860bps higher than AMC in 2019) and more suburban locations (lower rent),” adding its balance sheet could encourage “opportunistic M&A.”

He maintained its Outperform rating and added a dollar to raise its target price to $24.

Also under analysis was Reading International Inc. RDI, which operates art house venues primarily in New York City, Australia and New Zealand. Beynon noted that while these specialty theaters were strong performers before the pandemic, they now face higher rents, a content inventory challenge and greater competition from other entertainment channels. As a result, he downgraded the stock from Outperform to Neutral and lowered the price target from $8 to $6.

AMC Price Action: AMC's stock is trading down 2.8% to $45.77 at publication time.

Cinemark is down 3% to $17.30, while IMAX is down 1% to $15.55.
Photo: Dave Dugdale / Flickr Creative Commons.