Benzinga’s March 9 headline about AMC Entertainment Holdings (NYSE:AMC) painted a pretty picture. Unfortunately, if you read beyond the headline, you’ll quickly realize the news about AMC stock isn’t nearly as flattering as one might think.
The headline declares, “AMC Sees Price Target Doubled At Wedbush Amid Meme Stock Renaissance.”
The good news: Wedbush analyst Michael Pachter upped his 12-month target price from $2.50 to $5.
The bad news: AMC has $11.3 billion in total debt as of the end of the cinema operator’s third quarter.
The Reddit gang might like the risk-to-reward at current prices. I don’t. Here’s why.
AMC Stock Valuation Deceptively Low
According to Morningstar, AMC’s current price-to-sales ratio is a modest 0.39. However, based on its trailing 12-month revenue of $2.53 billion and a market capitalization of $3.54 billion, the multiple is more like 1.41x sales.
I’ll go with that.
There aren’t many stocks trading on the New York Stock Exchange that you can buy for a low P/S multiple of 0.39. Of the 59 communication services stocks trading on NYSE – only those with a market capitalization greater than $2 billion – only KT Corporation (NYSE:KT) has a P/S ratio below 0.39.
The company with the highest current ratio is United States Cellular (NYSE:USM) at 3.0x.
A high current ratio isn’t the be-all and end-all, but it does portray a highly liquid business. USM has a P/S ratio of 0.75, below its five-year average of 0.84.
Now, I don’t know a whole lot about USM. And, frankly, I don’t care too much about what it does to make a buck. I’m just pointing out that AMC isn’t the best value out there.
Not by a long shot.
What About Debt?
The Wedbush analyst addressed the elephant in the room while discussing his target-price increase.
“AMC may take years before it is able to revisit its prior growth strategy as it repays its growing mountain of debt,” Benzinga quoted Pachter.
AMC will report earnings March 10 after the close. With its stock up double digits for the second consecutive day, it appears that investors seem to know something Pachter doesn’t.
No matter what the company’s earnings look like, I have to agree with the analyst. It’s going to have a tough time growing when all of its cash flow is directed toward debt repayment and not investments in its business.
Remember, in recent years, the theater business has not exactly experienced a renaissance. The novel coronavirus could have altered moviegoing in a way that Netflix (NASDAQ:NFLX) or the VHS never could.
Don’t get me wrong. I believe in the movie business. But when you have total debt that’s four times your market cap, something’s got to give.
From where I sit, MCS provides a much higher margin of safety than AMC.
The Bottom Line
Getting back to the future of moviegoing, Disney (NYSE:DIS) Chief Executive Officer Bob Chapek recently stated that he thinks consumers’ attitude has permanently changed regarding a night out at the cinema.
“The consumer is probably more impatient than they’ve ever been before, particularly since now they’ve had the luxury of an entire year of getting titles at home pretty much when they want them,” Chapek said at a Morgan Stanley media and technology conference. “I’m not sure there’s going back.”
If that’s true, I don’t see how AMC can fully recover from the loss of customers during the pandemic. Sure, the same thing can be said about all theater chains, including Marcus.
That said, when your debt load is almost 20 times higher, you don’t have nearly as much wiggle room. If interest rates rise, AMC’s goose is cooked.
I don’t know about you, but there seem to be 11 billion reasons why AMC stock isn’t a good buy at $10 or higher.
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.