AMC Entertainment (NYSE:AMC) announced on Dec. 22 that it is in the process of acquiring two large movie theater chain sites in Los Angeles and Chicago. This has good implications for AMC stock.
Given these acquisitions and others it is planning, plus audience statistics, AMC looks to be on a very good growth trajectory. As a result, expect to see AMC stock do quite well in 2022 despite its current weakness.
After peaking on Sept. 13 at $51.69 per share, AMC stock tumbled down to $16.64 after the selloff on Jan. 24. That reflects a dramatic drop of more than 67.8% in the past 4 months.
Moreover, since the end of 2021, AMC stock has fallen from $27.20 to $16.64, or $10.56 per share. That reflects a decline of more than 38.8% year-to-date (YTD). This could be too far too fast, especially given that AMC’s earnings are now likely on the mend.
Where Things Stand With AMC Entertainment
On Dec. 20, 2021, AMC reported that it set a post-reopening single-day attendance record in the U.S. Moreover, AMC broke several post-reopening attendance records. In fact, it broke opening attendance records for three straight days at the end of December.
In addition, AMC globally had record sales of more than two million tickets on Dec. 18. This was the largest single-day record since Dec. 25, 2019.
In its third-quarter earnings release, AMC Entertainment reported it had burnt through operating cash of $31.2 million. This was significantly better than the $127 million negative cash flow during the second quarter. It was also better than the outflow of $322 million during the first quarter.
In other words, with higher sales, the company’s cash flow situation is dramatically improving. This is likely to be the case for the fourth-quarter 2021 results as well. Those results should be released during the first week of February.
As it now stands, analysts forecast sales for 2021 to reach $2.49 billion, based on Seeking Alpha’s survey of seven analysts. But more importantly, they now expect $4.57 billion in sales for 2022. That represents significant growth of 83.5% for this year. As a result, analysts should expect the company will produce positive free cash flow (FCF) as well.
AMC’s Valuation
AMC stock had a market capitalization of $9.24 billion at its Jan. 24 price of $16.64 per share. This means that compared to the analysts’ forecast of $4.57 billion in sales for 2022, it is trading for just 2 times sales. That does not seem to be very expensive a multiple for a fast-growing company.
In the past, I have valued AMC stock using an assumed FCF margin and then an FCF yield metric. But there are simpler ways to do this as well.
For example, Seeking Alpha shows that by Q4 2023, analysts forecast sales of $1.5 billion. This puts it on a run rate of $6 billion in sales per year. That lowers its price-to-sales (P/S) multiple to just 1.5 times sales.
That is much lower than the average 2x P/S multiple that AMC stock has had in the past five years. This is the average P/S multiple shown by Morningstar in its valuation of AMC stock.
Therefore, this implies that AMC stock should be valued at 2 times sales, or $12 billion. This is 27.7% higher than the company’s present market cap. It means AMC stock should trade for $21.25 per share, or 27.7% higher than the present stock price of $16.64.
What to Do With AMC Stock
Investors might find this is a good time to average down into AMC stock, now that its price is weak. This can help lower the average cost for the long run and produce long-term profits, despite the short-term problem of the stock’s drop.
This is probably the best way to deal with AMC stock’s recent weakness. Moreover, when the upcoming quarterly and annual earnings are released, analysts are likely to upgrade their long-term forecasts as well.
Based on this, the company’s sales and earnings forecasts are likely to be upgraded as well. At that point, investors can see whether or not my forecast for a 28% higher valuation is too low.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in 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.
