Over the past six months, AMC Entertainment’s stock price fell to $2.86. Shareholders have lost 18.1% of their capital, which is disappointing considering the S&P 500 has climbed by 4.7%. This might have investors contemplating their next move.
Is now the time to buy AMC Entertainment, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think AMC Entertainment Will Underperform?
Even though the stock has become cheaper, we're cautious about AMC Entertainment. Here are three reasons why you should be careful with AMC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, AMC Entertainment’s 5.7% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the consumer discretionary sector.
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 8.1%, meaning it lit $8.14 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 $306.4 million of cash over the last year, and its $8.27 billion of debt exceeds the $423.7 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 cheer for all companies serving everyday consumers, but in the case of AMC Entertainment, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 2.3× forward EV-to-EBITDA (or $2.86 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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