Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is AMC Entertainment Holdings (AMC, Financial). The stock, which is currently priced at 7.85, recorded a loss of 3.34% in a day and a 3-month decrease of 81.06%. The stock's fair valuation is $50.02, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with AMC Entertainment Holdings should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of -0.94, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is AMC Entertainment Holdings a hidden gem or a value trap? These indicators suggest that AMC Entertainment Holdings, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Piotroski F-score and the Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. AMC Entertainment Holdings's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview
AMC Entertainment Holdings Inc is involved in the theatrical exhibition business. It owns, operates or has interests in theatres located in the United States and Europe. It provides amenities such as plush, power recliners, MacGuffins full bars, AMC Dine-In Theatres, premium presentation. The group operates in U.S. markets and International markets. It derives key revenue from the U.S. The company's market cap is $1.20 billion with sales of $4.30 billion. However, it has a negative operating margin of -4.74 and a low return on invested capital (ROIC) of -2.2.
Analysis of AMC Entertainment Holdings's' Profitability
Firstly, let's address profitability. One significant component of the F-Score is a positive return on assets (ROA). A closer look at AMC Entertainment Holdings's ROA reveals a worrying trend of negative returns. This indicates the company's inability to generate profit from its assets - a fundamental concern for any investor.
Observing the financials of AMC Entertainment Holdings, it's important to note that the cash flow from operations over the trailing twelve months (TTM) stands at $-460.2 million, whereas the net income in the same period is significantly higher at $-741.5 million. The Piotroski F-score considers this discrepancy as a potential red flag. The rationale behind this is that a company's operating cash flow is a more direct and less manipulated measure of its cash-generating ability than net income. Net income, while important, is susceptible to accounting treatments and non-cash items which can distort the true cash profitability of the company. If a company consistently shows lower cash flows from operations relative to its net income, it could indicate that the earnings quality is poor and the company might have difficulties sustaining its operations or financing its obligations, a fact which could negatively impact its financial stability and investor confidence.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Assessing the aspect of leverage, liquidity, and sources of funds, AMC Entertainment Holdings demonstrates an alarming rise in its debt-to-total assets ratio over the past three years. The provided data shows 2021: 0.98; 2022: 1.07; 2023: 1.10, expressed as percentages. A higher debt ratio suggests that AMC Entertainment Holdings is increasingly financing its assets through debt, thereby escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about AMC Entertainment Holdings.
Operating Efficiency: A Darker Picture
Examining the data provided: 2021: 54.48; 2022: 117.15; 2023: 171.53, it becomes evident that AMC Entertainment Holdings has seen an increase in its Diluted Average Shares Outstanding over the past three years. This trend signals that the company has issued more shares. While issuing additional shares can provide immediate capital for the business, it can also lead to the dilution of existing shares' value. This dilution occurs because the earnings of the company now have to be divided among a larger pool of shares, which could decrease Earnings Per Share (EPS). Consequently, if the company's earnings don't grow at a pace that matches or exceeds this share increase, it could lead to a reduction in the value perceived by existing shareholders, potentially impacting their investment returns. Hence, while additional share issuance may provide necessary capital, it is important to monitor its impact on shareholder value carefully.
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for AMC Entertainment Holdings, its current score suggests potential troubles. The company's profitability, leverage, liquidity, and operating efficiency all point towards financial instability.
AMC Entertainment Holdings's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of AMC Entertainment Holdings's Altman Z-score reveals AMC Entertainment Holdings's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating AMC Entertainment Holdings's historical data, 2021: -0.55; 2022: -0.72; 2023: -0.90, we observe a declining trend in this ratio. This downward movement indicates AMC Entertainment Holdings's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of AMC Entertainment Holdings, both the revenue per share (evident from the last five years' TTM data: 2019: 375.92; 2020: 316.17; 2021: 23.50; 2022: 33.29; 2023: 30.26; ) and the 5-year revenue growth rate (-47.3%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for AMC Entertainment Holdings's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
Despite its low price-to-fair-value ratio, AMC Entertainment Holdings's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Steelcase's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
Conclusion
In conclusion, despite the attractive price point of AMC Entertainment Holdings Inc (AMC, Financial), the company's declining revenues, profitability, and financial health suggest that it may be a potential value trap for investors. It is therefore crucial for investors
