It has been several weeks since AMC Entertainment (NYSE:AMC) and AMC stock had its 15 minutes of Reddit fame.
On Jan. 27, AMC shares hit a 52-week high of $20.36, closing out trading at $19.90, the highest price it had seen since October 2018. Now at $5.75 as I write this, it is still greatly overvalued.
As I see it, if you’re looking to bet on the recovery of movie-going, AMC stock isn’t even your best cinematic bet.
Here’s why I feel this way.
AMC Stock Needs to Lose Some More Value
AMC has an enterprise value of $12.8 billion. That’s based on a market capitalization of $1.9 billion, $11.3 billion in total debt and $420 million in cash.
That’s 17.3 times earnings before interest, taxes, depreciation and amortization (EBITDA). Put another way, a buyer of the entire company would have to pay $1.2 million for every one of its 10,700 screens across the globe.
How does that compare to other cinema chains?
Well, there aren’t a whole lot of U.S. comparisons given AMC is by far the biggest of the theater chains.
One example is Cinemark Holdings (NYSE:CNK). It has a current enterprise value of $5.5 billion or 27.3 times EBITDA. So, technically, it’s more expensive than AMC. However, on a per-screen basis, a buyer would have to pay $920,656 based on 5,974 screens in 16 countries.
That’s 30% less than AMC.
An Even Better Option
A second example is Milwaukee-based Marcus Corp (NYSE:MCS). It has faced a double whammy from the novel coronavirus pandemic as it owns hotels and resorts in addition to movie theaters.
It has an enterprise value of $1.1 billion or 23.6 times EBITDA. It operates two businesses: Marcus Theatres and Marcus Hotels and Resorts. It is the fourth-largest theater chain in the U.S., with 1,110 screens at 91 locations in 17 states. The hotel division owns eight hotels and manages another 10 in eight states.
Evaluating the per-screen amount isn’t as straightforward because it also owns hotels. To calculate the per-screen amount, we first need to come up with a value for the hotels and then back that out from its $1.1 billion enterprise value.
Seeking Alpha contributor Nicholas Bodnar wrote a lengthy article in December about the company’s valuation. His thesis: each division was worth as much or more than its $1.1 billion enterprise value. On the hotel front, Bodnar suggested that you could buy all of its hotels at an average cost of $35 million, 58% less than the industry average of $84 million or $137,000 per room.
Quibble all you want about his calculation.
However, were it to achieve $84 million a pop, the hotel business would be worth $1.5 billion to a potential buyer, $400 million more than the entire company’s enterprise value.
So, back out the $1.5 billion, and you have an enterprise value of -$400 million for the theater business. And as Bodnar points out, Marcus owns the real estate under many of its locations.
Marcus Theaters achieved its best year on record in 2019, generating $557.1 million in revenue and $128 million in EBITDA. Based on 17x EBITDA (AMC’s current EV/EBITDA), a buyer would have to pay $2.2 billion to acquire the chain.
Even at 8.5x EBITDA, the theaters’ value is $1.1 billion, equal to its overall EV.
Now, sure, you could argue that Marcus owns two wounded ducks right now. But given it finished the third quarter ended September 30, 2020, with a net-debt-t0-capitalization ratio of 35% with $218 million in cash and an available credit facility, it’s got plenty to get it through all of calendar 2021.
Trading at under $18 a share as I write this, a return to semi-normal later in 2021 should easily add $10 to its share price, and that, in my opinion, is being conservative.
The Bottom Line
As Warren Buffett likes to say, “Price is what you pay; value is what you get.”
You can buy AMC stock to impress all your Reddit pals, or you can make a smart investment and buy a down-but-definitely-not-out Midwest operator of theaters and hotels.
It’s your call.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.