AMC Entertainment (NYSE:AMC) is undervalued even though it has risen 282% in the last year and despite recent share issue fears. Moreover, even though year-to-date AMC stock is up 340% as of April 16, it is still worth considerably more. The stock closed at $9.33 on Friday, April 16.
I wrote last month that the stock is worth at least $13.44 per share based on two different methods of valuing the movie theater chain. This analysis still stands, although I now believe that AMC stock is worth $13.84, or 48% higher.
Sales and Valuation
For example, this analysis is based on the company’s own forecast that they provided on page S-7 of their Jan. 25, 2021 prospectus. In that filing, the company predicted that Q1 would show 10% of its pre-Covid attendance, 15% in Q2, 65% in Q3 and 90% in Q4.
Based on these sales and a 1.5x price-to-sales multiple for 2021 and 0.86 for 2022, I estimated AMC stock was worth $9.08. Even if I used a 1.0 ratio for 2022, the price would rise to $9.88 per share, or 5.9% above today’s price of $9.33 per share.
You can see these calculations in the table on the right. It shows that the average estimate, using the company’s own forecasts, ranges between $8.35 per share and $11.41. The midpoint is $9.88 per share.
The other method I used was a free-cash-flow (FCF) model. I estimated its FCF this year and next and applied a 3% FCF yield to derive the estimated price. This works out to an estimated price of $17.81 per share, or 91% above today’s price.
You can see in the table at the right that the range of the FCF model estimates is between $11.14 and $24.47 per share. The $17.81 figure is the midpoint of these two.
Price Target for AMC Stock
The table at the right shows the average of these two models for a final target value for AMC stock. The average of both models is $13.84 per share, or 48% more than the price on April 16.
This upside may take more than one year to happen. For example, if attendance takes longer than expected to recover, then it may take 1.5 years or longer for the stock to rise another 48% from here.
For example, over one and a half years, the return on investment (ROI) works out to an average annual return over 30% each year. If it takes two years, the ROI works out to over 20% each year. But hey, who cares, those are still good numbers.
AMC’s Share Pledge
AMC stock recently hit a high of $14 per share on March 18 and has sunk since then. The stock’s recent weakness could be due to its March 19 proxy statement filing and proposal number 1, which states that the company is looking for authorization to issue 500 million new shares.
That would mean more dilution to existing shareholders if the company were to actually issue those shares. For example, as of March 3, according to the proxy statement, there were only 450.156 million shares outstanding. So, in effect, an issue of 500 million shares, as authorized, would more than double the shares outstanding. That would not be good as it would effectively lower the price by at least 50%.
However, on April 15, the CEO, Adam Aron, told an interviewer, and later filed an amendment to the Def 14 proxy filing that the company would pledge if the authorization was passed. Here is what he said:
“…we hereby pledge at AMC that if the shareholders approve this authorization for 500 million new shares to be issued we will not use one of those 500 million shares in calendar year 2021. Not one. Not one.”
The CEO went on to say that the company has 43 million shares that are out there that were authorized in the year 2013 that they could use to issue to raise cash. At today’s price, for less a 5% discount for transaction costs, at $8.86 per share the amount would be $380 million. That is quite a significant amount.
Where That Leaves AMC Stock
Of course, that begs the question of why the company needs to gain authorization to issue 500 million shares. That aside, I think this is a very strong statement by the CEO indicating they have a lot of confidence that the company will have enough cash flow.
This should therefore act as a catalyst for AMC stock to move back higher. My model indicates it could be worth 48% more or $13.84 per share.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.