Last month, I wrote that AMC Entertainment Holdings (NYSE:AMC) could be worth $80 based on my own free cash flow (FCF) model. I also said it was very possible that AMC stock could fall below $40 before its value would be clear to the market.
As of July 16, it has fallen from $57 to $34.96. But do not despair –I believe it could still be worth as much as $73, which is more than twice today’s price.
As I mentioned last time, sellers needed to dump their AMC shares before prices would rise. But analysts still expect the company will make $4.75 billion in sales in 2022. By then, the company should be FCF positive. In my last article, I estimated that its cash flow margin would be 11%. This means it will generate $523 million in cash flow from operations (CFFO) by the year ending in 2022.
That would represent a huge turnaround for the company. So in effect, buying AMC stock now is a bet that the company will reverse course by that time.
Where Things Stand for AMC
Have you been to any movie theaters lately? They are jam-packed. From what I can tell, AMC should be having a good second and third quarter. And that’s even with some rather mediocre movies in theaters right now — it seems big studios are waiting until late summer or fall to show their best productions.
The strong showing I’ve seen in theaters makes me believe the company is on track to see a positive FCF profit in Q4 — or at least come very close. If that is the case, AMC probably won’t need to raise further cash.
That would take a big load off of the company. It would also lead analysts to believe that AMC’s FCF could grow significantly.
And don’t forget what I wrote last time: 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%. AMC’s CFO Sean Goodman also predicted that its capital expenditure spending would be between $100 million and $150 million in 2022. This means if AMC makes $4.75 billion in sales and its CFFO is 11%, the FCF could be $522.5 minus $150 million in capex, or $372.5 million.
What AMC Stock Is Worth
Assuming that AMC eventually trades at an FCF yield of 1.5%, the stock could have a market capitalization of $24.833 million. That number is determined by dividing $372.5 million by 1.5%. Based on this calculation, AMC could have a market value of $48.37 per share. That is 38.4% higher than its June 16 price.
In fact, with a 1% FCF yield, AMC’s market cap would be $37.5 billion and shares would be worth $73 each. That’s 109% higher than Friday’s price of $34.96.
This is how AMC stock could see a significantly higher value later in the year. But remember — this assumes the company eventually turns FCF positive.
However, my view is completely lost on other analysts. For example, TipRanks says the average of 8 analysts’ price targets is now $5.84 per share. That represents a potential drop of 82% in AMC stock. Seeking Alpha says that 9 analysts have an average price target of $5.25.
Using Probability Analysis With AMC Stock
Whenever there is a huge discrepancy between my valuation and others’ assessments, I use a probability matrix and try to be intellectually honest about the stock’s chances. For example, let’s say that there is a 45% chance I am right and a 45% chance analysts are right. The remaining 10% probability is that it will make a market return of, say, 15%.
So here is how that would work out. The expected return (ER) for my target price is 45% times 108%, or 48.6%. Using the same formula, the ER for the analysts’ target is -37.35%. And the market return ER is 10% times 15%, or 1.5%. So the total ER is therefore 12.75%.
Even if we take into account the worst possible scenarios, we can still expect to see AMC stock rise to $39.42 based on its July 16 price of $34.96.
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.