AMC Entertainment (AMC, Financial), the $3.1 billion Kansas-based media company, recorded an impressive 67.5% rise in total revenue to $1.28 billion and an interesting 70.3% drop in profits to $8.4 million in the first quarter, resulting in a profit margin of 0.7% compared to 3.7% the same period last year.
AMC logged a 73.8% rise in operating costs and expenses year over year resulting in lower overall profits in the quarter.
“AMC is off to a tremendous and record start in 2017. AMC’s ability to purposefully act on the opportunities and innovations that drive growth continues to set us apart and further solidifies our leadership position among movie-theater operators in the U.S. and Europe.
“Achieving record first-quarter 2017 adjusted EBITDA of $251.3 million is tangible evidence of what we have been saying for the better part of a year, that the earnings power of this new incarnation of a larger and more influential AMC is enormous compared to other operators and even to our own recent past.
"We would particularly point out three important developments at AMC so far this year. First, at the legacy pre-acquisition AMC theaters, we grew revenues at a meaningfully faster pace than the industry at large, due in part to our commitment to renovating theaters and the strength of our impactful marketing programs. Second, with our domestic acquisition, our rapid move to achieve cost synergies and efficiencies brought immediate bottom-line benefit, offsetting revenue weakness that had been prevalent at Carmike for eight of the 12 months and three of the last four months of 2016. We are directly focused on improving revenues at the acquired domestic theaters as well as furthering the cost reduction efforts that already are well in hand. And third, we are thrilled both by our brisk start in driving immediate revenue and earnings growth in constant currency in Europe, and the likelihood that our plans to drive even more earnings through renovation of European theaters will come to initial fruition in quantity as early as the end of 2018.
"We are only just beginning to unlock the growth potential of our recent acquisitions. The initial integration efforts of creating a transformed AMC have been done quickly and have been very smooth. As we now move to make what we expect will be highly lucrative investments in guest-facing initiatives like powered recliner seats, enhanced food and beverage offerings and the expansion of premium large format experiences, we are as confident as we could be in the future earnings potential of AMC. We remain optimistic about the opportunity to continue to deliver meaningful value to our shareholders both in the balance of 2017 and in the years ahead.” – Adam Aron, AMC CEO and president
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Valuations
AMC traded at premium compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 25.9 times vs. the industry median of 44.5 times, a price-book (P/B) ratio of 1.2 times vs. the industry median of 1.9 times and a price-sales (P/S) ratio of 0.67 times vs. the industry median of 2 times.
AMC had trailing dividend yield of 3.39% with 88% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 0.93 times and 19.7 times.
Total returns
AMC returned 28.68% total losses so far this year compared to the Standard & Poor's 500 index’s 9.98% (Morningstar).
AMC Entertainment
AMC Entertainment was founded 97 years ago. According to filings, AMC, through its direct and indirect subsidiaries, including American Multi Cinema and its subsidiaries, is principally involved in the theatrical exhibition business and owns, operates or has interests in theaters primarily located in the U.S. and Europe.
AMC is an indirect subsidiary of Dalian Wanda Group, a Chinese private conglomerate. Further, Dalian Wanda Group owned approximately 68.83% of AMC’s outstanding common stock as of Dec. 31, 2016.
AMC is the world’s largest theatrical exhibition company and an industry leader in innovation and operational excellence.
The recent combination of AMC, Odeon and Carmike made the company the largest theater operator in the world with 906 theaters and 10,558 screens in eight countries as of Dec. 31, 2016.
In addition, AMC is the No. 1 theater operator in the U.S., the No. 1 theater operator in the United Kingdom, Ireland, Italy and Spain; the No. 2 theater operator in Austria and Portugal; and the No. 4 theater operator in Germany.
According to filings, AMC has operations in four of the world’s 10 largest economies, including four of the five largest European economies (the United Kingdom, Spain, Italy and Germany). Additionally, the company is the largest global procurer in theatrical exhibition of film, food and beverage items, lighting and theater supplies.
In the U.S, approximately 52% of the U.S. population lives within 10 miles of one of AMC’s theaters.
In 2016, AMC generated 96.3% or $3.12 billion of its sales in the U.S, 1.8% in the United Kingdom, followed by other European and remaining countries.
AMC has two reportable segments: U.S. markets and International markets.
According to the company, each segment’s revenue is derived from admissions, food and beverage sales and other ancillary revenues, primarily screen advertising, AMC Stubs membership fees, ticket sales, gift card income and exchange ticket income.
U.S. markets
In the recent quarter, revenue in the U.S. markets climbed by 29.8% to $992 million or 77% of total unadjusted sales and delivered an adjusted EBITDA (1) margin of 20% (more profitable to international) compared to 19.2% in the same period last year.
International markets
The International markets segment consists of operations in the United Kingdom, Germany, Spain, Italy, Ireland, Austria and Portugal.
Revenue in international markets increased by 162 times to $291 million (22.7% of total unadjusted sales) and delivered an adjusted EBITDA margin of 18.3% compared to 5.6% in the same period last year.
Sales and profits
In the past three years, AMC generated 5.58% revenue growth average, 32.6% profit decline average and 3.1% average profit margin (Morningstar).
Cash, debt and book value
As of March, AMC had $313 million in cash and equivalents and $4.9 billion in borrowings, including capital and financing lease obligations, resulting in debt-equity ratio of 1.9 times compared to 2.2 times three months earlier. Stockholder equity has climbed $591 million while debt increased by $460 million in three months time.
Of AMC’s $9.94 billion assets 52%Â were goodwill and intangibles. The company recorded 29% increase in its book value to $2.6 billion three months since.
Cash flow
In the first quarter, AMC’s cash flow from operations increased more than sevenfold to $166 million. The company recorded higher cash flow despite lower profits in the period brought by increase in depreciation and amortization, loss adjustments associated with its merger activities, equity in earnings from nonconsolidated entities, receivables and lower cash outflow in other assets and payables among others.
Capital expenditures were $161 million leaving AMC with $4.7 million in free cash flow compared to $34.8 million in outflows in the same period last year.
Nonetheless, AMC allocated nearly six times its free cash flow or $26.2 million in dividends. In the past three years, the media company handed out 359% of its free cash flow in dividends.
In the recent quarter, AMC also took in $89.5 million in borrowings net any repayments made and other financing activities.
As mentioned by AMC, the company has been active in acquiring other companies in recent years. In 2015, AMC allocated $172.9 million in acquiring Starplex Cinemas. In 2016, the media company spent $497.8 million in its purchase of Carmike Cinemas and $438.7 million in acquisition of Odeon and UCI Cinemas.
In 2016, AMC took in $998 million in debt net repayments and other financing activities.
Conclusion
AMC delivered strong top-line growth year over year in its recent quarter. The company’s recent several acquisitions enhanced the company’s reach in global theatrical exhibits making it even larger in comparison to its operations a year ago.
Nonetheless, expenses and costs have climbed several percentage higher leading to lower overall profits.
AMC also appeared to have a good amount of blue sky elements in its assets and had a leveraged balance sheet while having maintained very generous payouts to its shareholders in recent years.
Fifteen analysts have an average price target of $36.03 a share – 52.7% higher than the share price of $23.6 per share (at the time of writing). Assuming a 35% revenue growth with a P/S multiple of 0.9 times followed by a 25% margin indicated a value of $23.36 per share.
In summary, AMC is a hold.
Notes
(1) AMC company filings:
The company presents adjusted EBITDA as a supplemental measure of its performance. The company defines adjusted EBITDA as net earnings plus (i) income tax provision, (ii) interest expense and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance and to include any cash distributions of earnings from our equity method investees. The measure of segment profit and loss the company uses to evaluate performance and allocate its resources is adjusted EBITDA, which is consistent with how adjusted EBITDA is defined in our debt indentures.
Disclosure: I do not have shares in any of the companies mentioned.
