AMC Entertainment (NYSE:AMC) reported on Jan. 25 that it had raised $917 million of “fresh capital,” including debt and equity. This helped propel AMC stock into a frenzy and short-squeeze spike last week.
The problem is that the company is heavily dependent on its projections, especially for the third quarter and especially Q4 2021. These forecasts assume that cash flow will return at much higher levels.
My assessment is that AMC stock is worth no more than between $3.54 and $4.26 per share. This article will discuss how I came up with that valuation.
Everything Hinges on Q3 and Q4
In its prospectus update on Jan. 25, the company made the following statement, from page S-7:
“If attendance levels increase, we currently estimate that our existing liquidity, together with a portion of the proceeds we anticipate receiving under our continuing at-the-market equity program and additional landlord concessions, would be sufficient to fund our operations during the remainder of 2021.”
However, the company gave a qualifier to this forecast that it can last through 2021. This was conditioned on a major uptick in attendance in the third quarter. Here is that statement:
“This requires an assumption that our attendance levels achieve approximately 10% of pre-COVID 2019 attendance levels during Q1 2021, 15% of pre-COVID 2019 attendance levels during Q2 2021, 65% of pre-COVID 2019 attendance levels during Q3 2021 and 90% of pre-COVID 2019 attendance levels during Q4 2021.”
Projection Inflation
The problem I see here is that the company expects attendance and sales to jump dramatically from 15% of 2019 levels in Q2 to 65% in Q3 and even 90% in Q4. This is going to be hard to achieve and does not stand up to logic and common sense.
For example, here is what the company said on page S-11 where it is at right now:
“Currently, our reopened theaters are generating only a small portion of the attendance and revenue from admissions and food and beverage sales compared to historical levels and our cash burn is expected to be higher than when theaters were closed.”
A small portion. That is how much compared to last year they have generated. Moreover, it seems much more likely that the attendance at its theaters will gradually increase. AMC has not yet announced its Q4 numbers. Analysts project just $159 million in Q4 revenue, even though last year it was $1.447 billion.
Moreover, last year’s Q3 revenue was $1.317 billion. So here is what management wants us to believe. In Q3, revenue will be 65% of that, or $856 million, and in Q4, 90% of $1.447, or $1.3 billion. Revenue will somehow jump magically from $159 million now to $1.3 billion a year later.
This projection does not stand up to reason. The most likely scenario is that attendance and revenue generation will gradually increase. People will likely still be leery of going into large group settings, despite having a large number of people with vaccine protection.
Therefore, it is highly likely that AMC Entertainment is going to have to raise more cash, potentially significantly more cash. This is despite their statement that they have all the liquidity they need for 2021.
What to Do With AMC Stock
Right now, AMC has at least 356.498711 million shares outstanding, based on page S-9 of its latest prospectus, and quite possibly a good deal more. On Feb. 1, Wanda Entertainment converted all of its super-voting Class B shares (3 votes per Class B share) into Class A shares. I am not sure if the 356.5 million share number in the prospectus includes these shares.
In addition, on Jan. 27, a convertible noteholder, Silver Lake Group, converted $600 million in 2.95% Convertible Senior Notes into 44.423 million shares. It is not clear if that number is included in the 356.498711 million total in the prospectus. It probably is not included. That would change the total to 400.922 million shares.
Therefore, at $6.83, as of Friday, Feb. 5, the estimated market cap is at least $2.738 billion. Moreover, the company is likely to raise more cash, I believe, which could increase dilution.
However, let’s assume that only half of the company’s projections come true for Q3 and Q4. That implies Q1 sales of $120 million (10% of 2019), Q2 sales of $226 million (15%), Q3 sales of $425 million (32.25%), and Q4 sales of $651 million (45%). That would total $1.42 billion.
This implies that the price-to-sales multiple is $2.738 billion/$1.42 billion, or 1.92 times. Given that the company is only recently out of bankruptcy fears, a more appropriate ratio would be no more than 1x or 1.2 times. That implies a fair value of $1.42 billion or $1.7 billion. With 400.9 million shares outstanding, the price target should be $3.54 (1x) t0 $4.26 per share.
I suspect therefore that AMC stock will drift down to between $3.54 and 4.26 per share, as the implications of its overly optimistic projections seep into the market’s assessment of AMC stock.
On the date of publication, Mark R. Hake does not hold a long or short position in any of the stocks in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
