What a brutal six months it’s been for AMC Entertainment. The stock has dropped 37.2% and now trades at $1.72, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy AMC Entertainment, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is AMC Entertainment Not Exciting?
Even with the cheaper entry price, we don't have much confidence in AMC Entertainment. Here are three reasons why AMC doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, AMC Entertainment grew its sales at a 31.3% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While AMC Entertainment posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, AMC Entertainment’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7%, meaning it lit $6.98 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
AMC Entertainment burned through $365.9 million of cash over the last year, and its $8.14 billion of debt exceeds the $428.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the AMC Entertainment’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of AMC Entertainment until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
AMC Entertainment isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 14.8× forward EV-to-EBITDA (or $1.72 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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