Last month, I wrote that AMC Entertainment Holdings (NYSE:AMC) is not worth more than between $3.54 and $4.26. This was based on my assessment that the company will produce only half of its forecast sales projections for Q3 and Q4 this year. I also felt that AMC stock was not worth more than 1 to 1.2 times sales.
However, given that the vaccine takeup rate has risen significantly and people seem to be less concerned about the novel coronavirus, I think AMC stock’s target value should be higher. Therefore I suspect that the company’s forecast can be taken to 75% of the sales projections.
Moreover, I think that the price-to-sale multiple for the company can be taken to 1.5 times from 1.2 times.
The bottom line is that I believe that AMC stock is now worth about $7.35 per share. It could be worth more if the sentiment changes quickly during the summer and it appears that Q3 and Q4 revenues will pick up greater than forecast.
Valuation of AMC Stock
You can see how I modeled AMC stock on the table at the right. Keep in mind that this is based on the comments that management made on page S-11 of their latest prospectus:
“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.”
Therefore, in the third column of my table, you can see I multiplied that forecast percentage in the second column by the 2019 pre-Covid numbers.
Click to Enlarge
The fourth column shows what percentage I think the company will actually achieve of the forecast. Notice that in Q3 and Q4 I have lowered this to 75%. In my last article, I put this at 50%. In other words, I am upgrading my forecast.
Then, after adding up the total sales forecast for 2021, I put a 1.5 multiple on that figure. This results in a market value close to $3 billion. My estimate of the total number of shares outstanding now is 400.9 million. Therefore, that puts AMC stock on a per-share value of $7.35 (i.e., $2.98 billion divided by 400.9 million).
AMC will release its earnings on March 10, and we then will know if it is updating these forecasts. Moreover, we can also see how much cash the company has and its total number of shares outstanding. Those figures will allow me to update this forecast.
For example, what degree of confidence does management have that it can achieve this level of 65% of pre-Covid sales in Q3? If I can suspect that they are more confident than ever before, or if they raise their percentage forecasts, then there is reason to raise the target price.
What to Do With AMC Shares?
The bottom line is that if you going to invest in AMC you need to have a simple, working model like this for the value of the company. As new information comes in, you can adjust your assessment.
The problem is that there is no margin of safety in the stock price. At $8.93 per share on March 2, AMC was trading more than 21% above its fair value of $7.35 per share using my model.
Therefore, I suggest that you wait until the stock falls, especially since it has been quite volatile in the past month or so. Or, if management comes in with an even higher forecast for 2021 sales, the target price might end up higher than the stock price.
In that case, just make sure there is still plenty of margin of safety in your projections. That is why I used just 75% of management’s forecast for Q3 and Q4 sales. This provides a buffer for safety that every target price and stock model should have.
Bottom line, wait for AMC stock to fall below $7.35 per share. Or else, on March 10 look to raise that target price if management’s forecasts for 2021 are higher than their previous estimates.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities 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.
