AMC Entertainment (NYSE:AMC) continues its strategic expansion of U.S. theater locations. While that might give it a greater market share, it’s a terrible move for shareholders and AMC stock.
On Dec. 22, AMC announced that it had reached lease agreements for former Pacific Theatres and ArcLight Cinemas locations in Los Angeles and Chicago. Additionally, in 2021, it acquired four theater locations from the now-defunct theater chain. The theaters are expected to reopen under the AMC banner this spring.
AMC CEO Adam Aron was pumped about the theater acquisitions: “These theat[er]s have previously been high-traffic, successful locations, in two of AMC’s top markets, and we are pleased to offer the AMC experience at them a few months from now in 2022,” Aron stated in the company’s December press release.
“These are prime examples of how AMC is staying on offense, looking for opportunities to strengthen our company through the acquisition of these popular locations.”
The CEO went on to say that amongst the approximately 150 theaters in the Los Angeles area, two recent acquisitions in Southern California – AMC The Grove 14 and AMC American at Brand 18 – are routinely in the top 10 for box office receipts in the region.
According to the company website, there are 38 theaters in the Los Angeles area. The 2020 10-K says California had 54 theaters at the end of 2020. So, the LA market accounts for almost three-quarters of its California business. Based on 597 theaters in the U.S. as of the end of September, the LA market accounts for 6% of its total theater count.
So, you could look at the numbers above and surmise that the company has plenty of expansion possibilities in the LA market, or you could view its 25% market share in LA as plenty, given AMC already controls a majority of theaters across the country.
Does it need more than 600 theaters in the U.S.?
What’s the Los Angeles Market Worth?
An article from the Los Angeles Times says that city is “the nation’s biggest box office market,” but it doesn’t provide any specifics. However, the March 2021 article did say that the U.S. box office revenue in 2019 was $11.3 billion.
According to CNBC data from Comscore, Los Angeles is the largest designated market area (DMA) in the U.S., accounting for 8.9% of ticket sales, 150 basis points ahead of New York.
So, Los Angeles’s share of 2019’s box office was approximately $1 billion [$11.3 billion x 8.9%]. Based on my guesstimate of 25% market share in the Los Angeles DMA, it’s worth $250 million in revenue to AMC stock each year.
In 2019, AMC’s revenue from admissions was $3.3 billion, which suggests Los Angeles accounted for approximately 7.6% of its overall box office. Using the same assumption, food and beverage were worth an additional $130.7 million in revenue [$1.72 billion x 7.6%] in the Los Angeles market. That’s $380.7 million in total.
Based on a current price-sales ratio of 5.8x, my back-of-the-napkin estimate suggests Los Angeles is worth $2.2 billion in market capitalization.
However, that assumes that the P/S multiple is reasonable. In 2019, its P/S ratio was o.2x. At this multiple, Los Angeles is worth $76.1 million, not $2.2 billion.
The Bottom Line on AMC Stock
In the end, AMC’s reliance on movies and theaters will be its undoing. The country doesn’t need more theaters. According to Page 12 of its 2019 10-K, there were 5,548 theaters in the U.S. and Canada. Back out the standard 10% for Canada – Canada’s population is approximately 10% of the U.S. – and you have 4,993 in America. AMC’s 597 theaters account for about 12% overall.
You can add more theaters and screens to bump up the 12%, but ultimately, the trend in terms of attendance is declining.
To deserve its $11.7 billion market cap, AMC has got to bring to the table a more diversified set of revenue streams. But, unfortunately, higher ticket and food/beverage prices can only do so much.
As the business is constructed today, I’m not sure how any investor can view its potential growth with anything but skepticism.
Its business strategy remains flawed.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.