Sometimes, industries that are left for dead aren’t actually going to die. In that scenario, stocks that are priced-for-death could stage huge rebounds. Such is the case with AMC Entertainment Holdings Inc (NYSE:AMC) and the movie theater industry. Movie theaters were presumed to be a dying breed thanks to technology making at-home entertainment better, cheaper, and more convenient than ever. As such, AMC stock dropped from nearly $35 in late 2016 to just over $10 in late 2017.
As it turns out, though, movie theaters aren’t as dead as everyone thought. The 2018 box office is off to a red-hot start, and with a stellar movie line-up still to come, it looks like 2018 could set box office records.
How does the box office set records in a declining movie industry? Maybe the movie industry isn’t as bad off as we all thought. Although at-home entertainment is growing in popularity, movie theaters are adapting to become experience destinations that consumers still love to frequent.
At the heart of this rebound is AMC stock. It has bounced off its $10 lows in late 2017 to above $17 today, a near 70% rally in a just a few months.
This rally in AMC has more firepower. Fundamentals imply that shares remain materially undervalued in a long-term window. Meanwhile, the stock could get a near-term boost thanks to a robust summer movie line-up.
All in all, AMC stock looks like a buy here and now.
Here’s a deeper look:
Movie Theaters Aren’t Dead
We all know the story. Amazon.com, Inc. (NASDAQ:AMZN) is killing shopping malls, while Netflix, Inc. (NASDAQ:NFLX) is killing move theaters.
But maybe killing is the wrong term. Perhaps the better way to say this is Netflix and Amazon are forcing shopping malls and movie theaters to change.
Indeed, they are doing that. Malls have gone from pure shopping destinations with cheap food courts to multi-purpose experience destinations complete with shopping, restaurants, movie theaters, gyms, arcades (think Dave & Buster’s Entertainment Inc (NASDAQ:PLAY)), and much more.
This transition has worked, and as a result, mall-based retailers are reporting much better numbers and mall stocks are soaring. Just look at shares of Abercrombie & Fitch Co. (NYSE:ANF), Urban Outfitters, Inc. (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO), Macy’s Inc (NYSE:M), and Nordstrom, Inc. (NYSE:JWN) over the past several months.
The trend is up, up, and away.
Meanwhile, movie theaters have undergone their own transformation. They have gone from pure big-screen, movie-watching destinations to experience destinations with premium reclined seating, robust food menus, alcohol bars, and enhanced viewing and listening capability.
This transition has also worked. Movie theater attendance is up, and expected to rebound strongly this year after hitting a 25-year low.
Meanwhile, ticket prices are going up, as are both total and per capita concession spending (AMC reported that the number of attendees buying concessions has risen from 64% in 2011 to 71% today, while average concession spending per patron in the U.S. rose more than 5% year-over-year last year).
In the long-term, AMC will do just fine. Yes, Netflix adoption will rise by a ton over the next several years. But even with Netflix adoption in the U.S. at all-time high levels, movie theater attendance is inflecting upward. Clearly, the two can co-exist.
AMC Stock Is Undervalued
By my numbers, AMC stock is worth somewhere around $20 today.
Revenue growth trended around 5-6% per year before this year (acquisitions caused a huge spike in revenues). Over the next several years, revenue growth may be slower than that 5-6% range, but not much slower. Revenue growth of 3-5% seems sustainable long-term.
Meanwhile, operating margins normally hover around 6-8%. They should be able to stay in that range because concessions are the company’s big profit driver, and concessions spending is on the rise. Thus, 7% operating margins seem sustainable long-term.
Roughly 4% revenue growth over the next 5 years on 7% operating margins implies revenues of $6.2 billion and operating profits of $433 million in 5 years. Taking out $100 million to net interest expense, 25% for taxes, and dividing by 130 million shares, that equates to around $1.90 in earnings per share in 5 years.
A market-average 16-times forward multiple on those $1.90 earnings implies a four-year forward price target of $30. Discounted back by 10% per year, that equates to a present value of above $20.
Bottom Line on AMC Stock
Fears related to the death of movie theaters have been greatly exaggerated. As such, AMC stock remains materially undervalued at current levels.
Moreover, this stock could get a big boost this summer thanks to a blockbuster movie line-up which features Avengers: Infinity War, Deadpool 2, Solo: A Star Wars Story, Ocean’s 8, The Incredibles 2, Jurassic World: Fallen Kingdom, and Ant-Man and the Wasp.
As of this writing, Luke Lango was long AMC, AMZN, PLAY