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Stocks  | April 9, 2021

If there’s a person on this planet that’s rooting for cinema investments like AMC Entertainment (NYSE:AMC) and AMC stock, I don’t think there’s any question I’m near the top of the list.

My childhood was spent in movie theaters. Literally. My grandfather ran the Canadian movie theater chain Famous Players. Owned by Viacom (NASDAQ:VIAC) before being acquired by Cineplex (OTCMKTS:CPXGF) in June 2005, I continue to hope the pandemic hasn’t sucked the life out of movie palaces across the globe.

This is why it’s so tough to argue AMC is more like a $5 stock at this point in the proceedings rather than a $15 one.

Here’s why.

An Interesting Argument

InvestorPlace’s Vandita Jadeja made an interesting argument recently about the various headwinds AMC faces in the future.

Whether we’re talking about its overall financial health or the stiff competition it faces from within the industry — Marcus Corp (NYSE:MCS), Cinemark (NYSE:CNK), and Cineplex to name a few — or the surge in video streaming during Covid-19 that’s bound to reduce the future theatergoing audience to some extent, AMC’s prognosis is anything but good.

Ten years from now, I doubt we’ll be having this conversation. Consumers will be doing a lot of the things they used to do before the pandemic. However, where I live in Nova Scotia, which has generally been spared from major illness due to Covid-19, there are people who still jump onto the road to avoid a passing pedestrian.

I doubt that feeling will be shaken off easily even after we’re all vaccinated and safe from the virus. Therefore, places such as theaters and cruise lines, where people are packed in cheek to jowl, will likely continue to experience some lingering doubts. That will impede the ability to return to normal audience levels.

However, I have no doubt that ultimately, we will return to normal leisure practices. Maybe not in 2021, but 2022 for sure.

In the meantime, my colleague’s overarching argument that AMC’s woeful finances combined with unknown future traffic suggest $10 is not the true value.

The True Value of AMC Stock

The last time I wrote about AMC was in early March. I concluded that there were 11 billion reasons AMC wasn’t a $10 stock, let alone $15. In the month since, investors have had a tug-of-war to determine its future direction. As is often the case, it went sideways, remaining around $10.

My biggest concern was debt. It had $11.3 billion at the end of Q3 2020. It reported Q4 2020 results the day after my article appeared. Debt was marginally higher at $11.38 billion.

In terms of revenues, they were $1.24 billion in 2020, down 77.3% from a year earlier. As would be expected under such a revenue implosion, it had an adjusted loss per share of $16.15, down 1,400% from a $1.08 loss in 2019.

There was a 79% decline in attendance in 2020, 81% down in the U.S., and 73% internationally. As a result, its adjusted free cash flow went from $359 million in 2019 to -$1.2 billion in 2020, a $1.6 billion swing.

So, based on 450.2 million shares outstanding as of March 11, 2021, and net debt of $11.07 billion ($11.38 billion total debt minus $308 million cash) at the end of December, you get net debt per share of $24.59, or 2.5 times its current share price of $9.65.

By every standard, that’s not a winning hand.

In comparison, Cineplex, who I mentioned earlier, had net debt of 1.88 billion CAD ($1.50 billion) at the end of the fourth quarter. Based on 63.33 million shares outstanding (816.37 million CAD divided by 12.89 CAD), it had net debt of 29.70 CAD per share. That’s just 2.3 times its current share price.

The Bottom Line

I thought Marcus was a better buy than AMC in my last article. This time, I believe Cineplex is the better buy. Both come down to the fact they have less debt.

My InvestorPlace colleague Larry Ramer stated in early April that AMC’s market capitalization is way higher than before the pandemic. In fact, it’s five or six times its market cap before Covid-19.

And for what? The opportunity to watch it lose $3 a share in 2021 and 88 cents in 2022. No, thank you.

I don’t think there’s any question that AMC stock is anything other than a $5 stock. I guess we’ll find out soon enough.

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