Everyone thinks AMC Entertainment (NYSE:AMC) stock has moved up too far too fast. Most analysts think it is overvalued. But I am here to show you how it might not be as expensive as it seems. In fact, my model shows that it could be worth, under certain circumstances, up to $79.72 per share. I will go through the numbers in a simple model you can keep in your head as you trade the stock.
By the way, this does not mean that I believe AMC stock won’t fall. In fact, I think there could be an opportunity to buy it below $45 and still make money in the future.
And just so you know, I have been consistently positive on the stock recently. In mid-April, I wrote about AMC stock. I put forward a simple cash flow model showing that at $9.66 AMC stock was worth considerably more. My target price was in the mid-teens, but my model showed that it could be worth up to $24 per share. I will use parts of that model in this article, so you might like to review it.
Listening To Management About Cash Flow
The most important thing to do to value AMC stock is read the transcript of the Q1 earnings conference call that occurred on May 6. Pay particular attention to what management said about when the company will reach cash flow profitability.
At one point Meghan Durkin, of Credit Suisse, asked the company directly, “Are you still expecting to crossover and turn cash flow positive in 4Q 2021?”
She directed the question to CFO Sean Goodman, but Adam Aaron jumped in and answered a different question first, and then the CFO took up the cash flow positive timing issue. At first, he said that the revenue of the industry will be $5 billion in the U.S. Then he said this about the timing of turning cash flow positive:
“… our Q2 cash flow will be pretty similar to Q1. Q — the second half of the year overall will be significantly better than the first half of the year, but you’re going to see Q3 is going to be better than Q2, quite a lot better than Q2 and Q4 is going to be better than Q3, but exactly whether or not we will be breaking Q4 really does depend on how the final film slate ends up at the end of the day here.”
That is kind of a non-answer. But it seems to lead to a conclusion that the company will be close to, if not at, cash flow positive. That is important since it means that the company won’t feel as much pressure to raise cash and dilute shareholders after Q4.
This also implies that the company could end up having enough cash to survive until then. For example, the company announced on June 3 that it had just raised another $587.4 million in an equity raise at $50.85.
How To Value AMC Stock
Here is how my model works going forward. It has three steps. First, we look at sales. Analysts assume that sales next year will average $4.79 billion by the end of 2022. Some are even higher. To simplify things let’s call it $5 billion. Analysts’ sales forecasts for 2023 are $5.19 billion.
Next, we estimate its cash flow from operations (CFFO) and estimate free cash flow (FCF). In the 12 months ending December 2019, the company made $579 million in CFFO on sales of $5.471 billion. That works out to a CFFO margin of 10.5%.
Applying this to the $5 billion forecast of 2022 results in a CFFO estimate of $525 million. During the earnings call, Sean Goodman also predicted that its capex spending would be between $100 million and $150 million. Therefore, the annualized run-rate free cash flow (FCF) is at least $375 million ($525 million – $150 million).
Third, we use FCF to value the AMC stock. For example, using a 1.5% FCF yield, FCF is worth $25 billion ($375 million / 1.5%). That is close to today’s stock market value of $25.36 billion.
In other words, using a 10.5% CFFO margin, and a 1.5% FCF yield, we can estimate that the market is valuing 2022 FCF at $25 billion.
So if the company ends up making an 11% margin and the market values it at 1.0%, the valuation will be $40 billion. Here is how that is calculated: $5 billion x 11% = $550 million, minus $150 million capex = $400 million, and divide this by 1.0% = $40 billion.
What To Do With AMC Stock
Given that AMC now has 501.78 million shares, a high estimate of $40 billion implies that AMC stock is worth up to $79.72. This is 54% higher than its June 14 starting price of $51.83.
So you can see that the market is looking forward to an FCF-positive company in 2022. Depending on how well it becomes FCF positive, the stock could still even move higher with an improved, but not out-of-the-question FCF yield of 1.0%.
So don’t believe all the pundits who think you must sell AMC stock before it implodes. There is a logical basis to believe that it could even go higher from here. However, most investors will wait for a chance to get in at a bargain price. I suspect there will be opportunities to buy below $45 and even $40 in the next month as some investors take profits.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.