What is the true value of AMC stock?

So is the AMC Theater a good investment after all? Even if we assume AMC stock is on the verge of what’s called a “blow-off” rally, AMC stock is still cheap on the valuation front.

Why?

Because even if AMC does blow off its huge valuation over the next few years, if the stock still trades at a 40%-plus discount on a free cash flow basis, it might still be worth buying at today’s prices. Let’s take a closer look at AMC, what it sells, and what investors might pay for it in a few years.

  • Company Snapshot

                                    At the end of the third quarter of 2017, AMC owned or operated 721 theaters in the U.S. and Canada, as well as 94 theaters in the U.K. and 34 theaters in Brazil, as it continues to expand overseas.
Headquartered in Kansas City, Missouri, AMC Entertainment was established in 2012 when its predecessor, AMC Theaters, bought rival theater chain Ovation Theaters. As for the Ovation brand, AMC shut down all of its Ovation theaters over a three-year period beginning in 2014.
  • Morningstar

                            AMC has increased its theater count from 9,100 theaters at the end of the third quarter of 2014 to 989 theaters at the end of the third quarter of 2017. That’s about a 30% increase in theater count.
The biggest driver behind the increase has been the company’s deliberate strategy to add more premium theater brands at high-traffic locations.
By doing so, AMC has proven that it can sell its theaters at a premium. Its stock is now much more of a value play, and it continues to enjoy a massive growth opportunity in the theater industry.
  • Company investor presentation

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                                         At the end of the third quarter, AMC had the highest ticket price in the United States. That’s because AMC sells its tickets at a lower average ticket price than any other domestic movie theater chain.

On the company’s first quarter earnings call in July, CEO Adam Aron said;

Our latest high-quality yield yield should give investors comfort in our resiliency as well as the fact that it’s backed by the safety and security of our free cash flow. Our revenue yield has actually increased slightly, despite a 42% drop in our pricing of average ticket price of nearly 3% over the same period last year.

He then went on to explain the profit margin impact of the drop in pricing:

The industry’s persistent effort to cut pricing has put upward pressure on our average ticket price, despite the fact that the growth in our overall attendance has actually been quite impressive. The price of a movie ticket is going up and yet our margins are basically flat. This is primarily because of the adverse impact of this pricing decline on the concessions profit.

Other than the declining price of movie tickets, AMC’s business appears to be pretty strong.

For example;

at the end of the third quarter, AMC was the largest U.S. theater chain based on the number of theaters, as well as the highest-grossing chain overall, based on ticket revenue.

At the end of the third quarter of 2017;

                At the end of the third quarter of 2017, AMC Entertainment had 5% of the domestic market, versus roughly 6% for the largest domestic movie theater chain, Regal Entertainment Group. Interestingly, AMC also has the second highest concession revenue, at 28% of its revenue, followed by Regal at 22%.
Over the past year, AMC has been growing its overall attendance. By the end of the third quarter, AMC’s attendance had grown 18% from the year before. That’s a significant improvement for AMC. In the first quarter of 2017, AMC saw its attendance fall 1% year over year.
It was a similar story for theater concession revenue. Its concession revenue fell 12% year over year in the first quarter.

Another example of AMC’sgrowth opportunity is its partnership with Apple Inc. (NASDAQ:AAPL) to sell digital movie downloads of all movies, both new and older ones, on iTunes.

Although the current iTunes Movie Store is only available to Apple customers, AMC says its theaters are eligible to participate in Apple’s future digital movie platform.
The growth opportunity has been demonstrated by the addition of 972 new theaters in the first nine months of 2017, for a 5% increase in theater count year over year. That growth rate is actually lower than it was in the first half of 2016, at 6%.
This indicates that AMC is getting more aggressive in adding new theaters, but it’s also developing the opportunity of being an iTunes partner.