AMC Entertainment (NYSE:AMC) provided guidance for 2021 and 2022 in its earnings call on May 6 that should boost AMC stock. Based on its prospects guidance, I believe that AMC stock is worth about 61.7% more than Friday’s closing price of $9.51. That puts its target price at $15.38 per share.
Let me explain how I came up with this target price.
First, the company’s CEO and CFO were very clear about their “liquidity runway,” as they call it, during the call. The bottom line, using historical industry revenue statistics and their historical market share, is that AMC will have enough cash to last through the end of 2022.
Adam Aron, the CEO, made these comments after the CFO discussed the company’s Q1 financial position, which has about $1 billion in cash. In addition, the company has been raising cash from its 43 million ATM (at the market) offering. In total, that will bring in about $400 million or more.
Free Cash Flow Predictions
Next, the CEO said this:
“And given our sizable market share, our domestic box-office in 2021, above $5 billion or domestic box-office in 2022 above $8 billion would put a lot of extra money into AMC’s profit.”
This means he believes that the company will be free-cash-flow positive by the end of 2022. This is how the company will be able to sustain itself.
For example, during 2019, the company had about $5.02 billion in revenue, and the industry was about $12 billion or so. That gave it a 41.8% market share. To be conservative, let’s use 40%. This implies that its 2022 revenue will be $3.2 billion. This is even below analysts’ forecasts of $4.76 billion in 2022.
Using its historical cash flow margin of 11.5%, we can therefore predict that 2022 cash flow from operation (CFFO) will be about $377 million. In addition, during the call, the CFO indicated that the 2022 capital expenditure will be $125 million (at the midpoint of his range). That implies that its free cash flow (FCF) will be $263 million. This works out to an FCF margin of 8.22%.
Analysts predict AMC will have about $5.19 billion in revenue by 2023, according to Seeking Alpha. Using this same 8.22% FCF margin, 2023 FCF will be $426 million.
Valuation
Now we can estimate the value for AMC stock. For example, using a 5% FCF yield, the market capitalization of AMC will be $5.26 billion (i.e., $263 million / 0.05 = $5,260 million). This is $1 billion higher than the stock’s existing $4.28 billion market value, or 22.8% higher.
And remember, I am using a much lower revenue forecast for 2022 than other analysts. Moreover, the $426 million FCF forecast for 2023, using a 5% FCF yield, results in a market cap of $8.52 billion (i.e., $426 million / 0.05 = $8.52 billion). This is 100% higher than today’s price.
Therefore, the average between these two forecasts ($5.26 billion and $8.52 billion) is $6.89 billion. That represents a gain of 61.7%, to $15.38 per share.
What to Do With AMC Stock
Analysts don’t agree with me. For example, both Yahoo! Finance and Seeking Alpha indicate that analysts think the next 12 months’ price target is $4.44. Moreover, TipRanks indicates that six analysts have a 12-month target price of $6.38, or 35% below today.
That is pretty sad. They clearly think that the company will need to raise further capital and that this will dilute the shareholders so badly that AMC stock will sink. Or else, they don’t believe that the second half of this year will show a huge return to theaters, as AMC predicts will happen.
I suspect they are wrong. The reversion to the mean force is very strong. People want to get out of the house. They want to do things they used to do. Hollywood is ready with a whole new slew of movies. Yes, people are watching at home more and yes, some film production firms are posting movies on their own sites first. But the drive to see movies in an enclosed theater is very strong. In fact, the CFO pointed out that people are spending more when they go to the movies that are open.
For investors, keep in mind that my target price is a two-year target to mid-2023. That implies that my projection of a 61.7% total return will provide a healthy annual return on investment (ROI). It works out to 27.16% per year on a two-year compounded basis. That is a decent annual ROI for most investors.
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.
