AMC Entertainment’s stock price has taken a beating over the past six months, shedding 43.5% of its value and falling to $1.70 per share. 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? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think AMC Entertainment Will Underperform?
Even though the stock has become cheaper, we're swiping left on AMC Entertainment for now. Here are three reasons you should be careful with AMC 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 14% annual rate. Although this growth is acceptable on an absolute basis, it fell 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.
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 9.2%, meaning it lit $9.20 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 $295.3 million of cash over the last year, and its $8.20 billion of debt exceeds the $365.8 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
We see the value of companies helping consumers, but in the case of AMC Entertainment, we’re out. After the recent drawdown, the stock trades at 14× forward EV-to-EBITDA (or $1.70 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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