AMC Entertainment (NYSE:AMC) is now clearly in a turnaround. People are returning to the movies. Attendance is back, based on the company’s Nov. 8 release of its third-quarter results. This has huge implications for AMC stock. There now seems no doubt that AMC will become free cash flow (FCF) positive next year.
And, of course, that is good news for AMC stock. In the past six months, it has risen from $13.95 on May 17 to $42.68 as of Nov. 15. And don’t forget at its low, AMC stock hit a trough of under $2 in January.
At that point in time it looked like AMC Entertainment, the largest movie theater chain in the world, was going to go out of business.
But management saved the company. They should be congratulated. Still, the turnaround is not over. I suspect that it is worth at least 22% more at $52.16 per share. This article will explain why I think this.
Where Things Stand With AMC Entertainment
On Nov. 8 AMC reported that revenue for Q3 hit $763 million, up significantly from $119.5 million last year. Moreover, compared to the $444.7 million in Q2, revenue was up 71.6% on a sequential quarterly basis.
Needless to say, the company is still reporting losses, albeit improved in Q3 over Q2. For example, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was negative $5.4 million. This was significantly better than the loss of $150.8 million in Q2. In other words, the company was almost profitable this quarter, as opposed to a huge loss last quarter.
Cash Burn and Liquidity Improves
This implies that with higher revenue, assuming expenses stay under control, Q4 or Q1 could start to show positive adjusted EBITDA profits. In addition, I suspect that by early next year the company will become free cash flow (FCF) positive.
As it stands, the company has more or less achieved this kind of profitability. Here is what I mean. On page 2 of the earnings statement on Nov. 8, management indicated:
“AMC currently has liquidity availability of more than $1.8 billion (including cash and undrawn revolver lines), however the Company does not anticipate the need to borrow under the revolver lines during the next twelve months.”
In other words, the company does not need to turn to outside sources to finance its operations. That is exactly one definition of being free cash flow positive.
In fact, on page 10 of the earnings release, AMC Entertainment showed that its operating cash burn during Q3 was just $31.2 million. This improved significantly from $127 million burnt during Q2 and $322 million during Q1.
So cash burn is 10 times better in the space of just two quarters. Obviously, with higher revenue and stable costs, this is bound to occur. That is the basis for my optimism.
Where This Leaves AMC Stock
Interestingly, the company did not provide much in terms of guidance for either Q4 or next year. However, analysts now foresee revenue hitting $4.67 billion next year, up 85% over estimates of $2.53 billion in revenue for 2021.
As a result, we can use this to estimate its ongoing value. Right now AMC has a market capitalization of $20.56 billion. But if we assume that free cash flow could hit 10% of sales next year, or $466 million, the market value could easily hit $23.3 billion to $31.07 billion.
This is based on an FCF yield of between 1.5% and 2%. So, for example, if we divide $466 million by 2%, the target market cap equals $23.3 billion. At a 1.5% FCF yield, the market cap becomes $31.07 billion.
These represent a potential gain of 13.3% to 51.1% for AMC’s market value. Assuming a 10% stock dilution from potential warrants and options, that works out to a range of between 3.3% to 41.1% for AMC stock. In other words, on average the stock price could rise 22.2%.
That puts the average target price of $52.16 per share, or 1.222 x the price today of $42.68 per share. For most investors that represents a very good ROI.
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.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
