AMC Entertainment (NYSE:AMC) is facing a big summer and fall. It expects people to come back to the movie theaters en masse. I wrote about this several weeks ago when AMC stock was at $9.51 on May 7. I forecast that, based on historical numbers and the company’s guidance, it could be worth $6.89 billion or $15.38 per share. I still think that, but my new target is at least $15.88 per share and possibly as high as $17.20.
This is based on a forecast of $8.52 billion in market value, or 31.48% higher market value than today’s $6.48 billion market capitalization. In other words, 1.3148 times $12.08 (the AMC stock price as of May 21) is equal to $15.88 per share.
Valuing AMC Entertainment
How did I arrive at the $8.52 billion market value? Simple. I used the following method. I estimated that free cash flow (FCF) would reach $426 million by 2023, if not earlier. Then using a 5% FCF yield metric (i.e., $426 million / 0.05) I arrived at a market value of $8.52 billion.
So, how did I estimate the $426 million in forecast FCF? That is also simple. Seeking Alpha’s poll of analysts shows that they estimate 2023 revenue will be $5.19 billion, up from $4.79 billion in 2022 and $2.79 billion in 2021. I used an FCF margin rate of 8.22% to derive the $4.26 million estimate (i.e., $5.19 billion in revenue x 8.22% = $426 million).
So now I know you will ask me, how did I estimate the 8.22% FCF margin rate? That is actually a little more complicated. First, I used statements from management about their forecasts for 2022 cash flow and capital expenditure. These statements led me to believe that 2022 FCF would be $263 million.
My 2022 revenue estimate was $3.2 billion, based on an 11.5% cash flow margin, $125 million capex results in $263 million. This is 8.22% of $3.2 billion.
So that is how I estimate that AMC stock is worth $8.52 billion or $15.88 per share. But I want to point out something very important.
My complicated analysis for 2022 revenue results in a forecast of just $3.2 billion. But analysts followed by Seeking Alpha estimate revenue will be significantly higher than this at $4.79 billion. This is 50% higher than my estimate.
So, using this revenue, the FCF margin would be 8.89%. That would raise the 2023 FCF estimate to $461 million, and the target value to $9.227 billion, 42.4% higher or $17.20.
What To Do With AMC Stock
If you followed all of that the conclusion is that AMC stock is worth between $15.88 and as high as $17.20. This is 18% to 28% higher than today’s price of $13.42.
But this scenario could take up to 2 years to reach that price based on my assessment of 2022 and 2023 revenue. In other words, if AMC stock spikes up and reaches these prices fairly soon, I would take profits and move on. This is possible if the market likes what it sees in terms of summer and fall audience movie participation and the company’s results.
The idea is this if AMC stock pops in anticipation of higher revenue and profits and it reaches these price levels, sell it and wait for another opportunity. It is always possible there could be another chance to buy back in at today’s low prices.
Analysts don’t tend to agree with me. For example, TipRanks indicates that 6 analysts have an average price target of just $7.13 per share. This is 46% below today’s price.
But look at this: When I wrote about AMC stock on May 10, the TipRanks average target then was just $4.44. So they are slowly paying catchup with AMC stock, which has risen over 37% since my last article. So far they have been wrong about the stock.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
