AMC Entertainment (NYSE:AMC) is still worth quite a bit more than its price today. This is based on my belief that the company will eventually become free cash flow (FCF) positive before debt payments. I believe that AMC stock is worth around $58, based on the company’s recent earnings release and analysts’ revenue projections.
I have been consistently right about AMC stock so far, based on this model and my projections. For example, when AMC stock was at $34.62 on Jul. 19, I argued that its minimum price was $39.42 per share using a probability analysis technique. On Sept. 1, the stock closed at $43.69.
But that’s not all. Without the probability analysis method, I actually also estimated that its minimum value was $48.37. This was using a 1% FCF yield metric on an estimated FCF of $372.5 million next year.
So, based on its second-quarter earnings report, I believe this company can produce positive FCF next year. Here’s why.
AMC Stock: Where Things Stand
For Q2, AMC reported sales of $444.7 million, up from $18.9 million in Q2 2020 but down from $1.5 billion in Q2 2019. However, this revenue was significantly higher than the Q1 2021 revenue of $148.3 million. This means that revenue rose by almost $300 million in Q2 (i.e., $296.4 million).
In addition to this, though, AMC’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $150.8 million in Q2 2021. Moreover, the FCF for Q2 2021 was negative $251.7 million.
That’s the bad news. But the good news is that this is still an improvement from the results in Q1 2021. For example, adjusted EBITDA was worse at negative $294.7 million in Q1. Likewise, free cash flow was negative $324.8 million. In other words, as revenue grew by $296.4 million, FCF grew by $73.1 million (i.e., negative $324.8 million – negative $251.7 million).
This implies that the inherent FCF margin this quarter was 24.7% (i.e., $73.1 million / $296.4 million), which also coincides with the point I made in my previous article about AMC having a positive cash flow margin. That is how I came up with the $372.5 million FCF estimate for 2022.
Analysts now estimate that revenue next year will hit $4.6 billion. So, even assuming a 10% cash flow from operations (CFFO) margin, less $150 million in capex, FCF will hit $310 million. This is somewhat lower than my previous estimate.
What AMC Entertainment Is Worth
If we use a 1% FCF yield metric, then AMC Entertainment will be worth $31 billion. This is seen by dividing $310 million in estimated FCF next year (at a 10% margin) by 1%. The result is 32.4% higher than the recent market value of $23.4 billion.
In other words, AMC stock is worth 32.4% more than its Sept. 1 close price of $43.69, or $57.84 per share (i.e., 1.324 x $43.69). Granted, this is lower than my high estimate of $73 in July, but it also seems possible that that could eventually happen. Why? Because the Q2 improvement in FCF was a significant portion (about 24%) of its quarter-to-quarter gain in sales. So, eventually the FCF margin could end up trending higher.
This is not to say that the company won’t have to raise more equity just to survive. After all, it’s still burning through cash. But if AMC can last, the overall FCF margins it can produce (because it has in the past) will deliver the company.
What to Do with AMC Stock
Adam Aron, the CEO of AMC Entertainment, made no secret of his desire to raise more equity capital during the recent Q2 conference call. Most analysts are focusing on the dilutive effects this will have on AMC stock.
However, not too many of them are focusing on the possibility of AMC returning to FCF-positive status next year. If that happens, the stock won’t stay at its present price. Rather, AMC stock could move to around $58 per share — or higher.
So, it’s likely that AMC stock takes a hit when a new equity capital announcement comes about. But investors should begin looking at taking toe-hold positions in AMC as this happens — and even if the stock keeps rising.
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On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.