Times have not been good for movie theater operator AMC Entertainment Holdings (NYSE:AMC). Since I last wrote about the company in an article published in January of this year, an article in which I upgraded the firm from a ‘strong sell’ to a ‘sell’, shares have seen downside of 28.6%. That comes at a time when the S&P 500 is up 7.3%. But that barely scratches the surface of how bad things have really been. Since my first ‘sell’ article about the company in January of 2021, the stock has plunged an impressive 95.6%. By comparison, the S&P 500 has roared higher to the tune of 41.2%.
The sad truth is that the pandemic, which is now long since over, continues to play a painful role in how the company is performing. The business already had a great deal of debt leading into the pandemic. But when you combine a long term trend of declining attendance numbers with an unwillingness from Hollywood to produce as many movies as were being produced prior to the pandemic out of fear that consumers won't come to watch, and sprinkle on top of that new issues associated with industry strikes last year and the impact those will have moving forward, it's not surprising that the enterprise is seeing some pain. Looking at the data now, we are seeing some evidence that the picture is improving. But even so, now's not the best moment to pull that trigger in my opinion. For now, I do still believe that a ‘sell’ rating makes sense. But if the stock falls just a bit further or we fast forward to closer to the end of this year, the picture is likely to get better.
Some signs of life
When you look at the most recent data provided by AMC Entertainment, and you only focus on that short window of time, the picture looks pretty bad. The company has net debt as of this writing of $3.72 billion. That dwarfs the $692.4 million market capitalization of the enterprise. When you look at it from a revenue and profit perspective, things don't look great either. Consider, for instance, the final quarter of the 2023 fiscal year. This is the only quarter for which new data is available that I did not write about previously.
During that window of time, revenue for the business came in at $1.10 billion. This is positive in the sense that it represents an 11.5% increase over the $990.9 million generated during the final quarter of the 2022 fiscal year. But when you look at the bottom line, things could be a lot better. The firm generated a net loss of $182 million in the most recent quarter. The upside to this is that it does represent an improvement over the $287.7 million net loss generated in the final quarter of the 2022 fiscal year. Operating cash flow worsened from negative $33.3 million to negative $77.8 million. But when we adjust for changes in working capital, we get an improvement from negative $108.8 million to negative $67.3 million. The only profitability metric to come in positive was EBITDA. It went from $14.5 million in 2022 to $42.5 million for the final quarter of 2023.
The optimist will see that the picture is improving almost across the board. Revenue is growing, losses are narrowing, and cash outflows are getting better. But the fact of the matter is that the company is still hemorrhaging cash at a time when leverage is through the roof. This is what has kept me bearish about the business for so long. But when you take a step back, and you start looking at the bigger picture, you do start to see some even larger signs of improvement. For instance, from 2021 through 2023, revenue has nearly doubled from $2.53 billion to $4.81 billion. This has been driven by a surge in attendance from 128.55 million individuals to 239.49 million individuals. In the most recent quarter, the 73.58 million that attended the company's properties came in 38.4% above the 53.18 million reported the same time of the 2022 fiscal year.
This comes as the industry itself has seen improvement. Back in 2021, the industry saw 447 million movie theater attendees. Keep in mind that these are essentially individual visits, not unique individuals. So if you attended 10 times that year, you're counted 10 times in that figure. But even so, from 2021, this number grew, eventually hitting 833 million in 2023. The industry also benefited from a rise in the average ticket price from $10.17 to $10.84. You can also see, in the image above, international attendance rising over the past few years (for the markets in which AMC Entertainment has a presence).
As bad as the bottom line for the company has been, we are starting to see some major improvements on that front as well. In 2021, AMC Entertainment generated a net loss of $1.27 billion. By 2023, that loss had declined to $396.6 million. All other profitability metrics improved during this window of time as well. As the chart above illustrates, for instance, operating cash flow went from negative $614.1 million to negative $215.2 million. On an adjusted basis, it improved from negative $724.1 million to negative $107.9 million. And lastly, EBITDA went from negative $291.7 million to positive $425.8 million.
Even though it tends at the company's locations has grown, the firm has not been afraid to cut down the number of theaters that it has in operation. With the end goal of cutting costs and focusing on the most profitable locations, the business has gone from 946 locations at the end of 2021 to only having 898 by the end of 2023. This cut the number of screens down from 10,562 to 10,059. In the long run, this will reduce the company's ability to return to the kind of size that it had previously. But absent these initiatives, the business might not have survived this long. Management has also not been afraid to look for opportunities elsewhere. For instance, in March of this year, management announced that the company's popcorn brand will now be available for purchase at all Publix locations, all The Kroger Co (KR) stores, and on Amazon’s website. This followed a nationwide rollout in 2023 that consisted of the company selling its popcorn products at over 2,700 Walmart (WMT) locations. The firm also seems to be getting a little help every now and then from one off opportunities. The latest example of this is a settlement that it received from some investors entitling it to $3.3 million. That's a drop in the bucket, but every bit helps.
It won't take much more improvement for shares of the company to reach a level that is at least fairly valued. In the table above, you can see how much operating cash flow the company would need to trade at a price to operating cash flow multiple of either 10 or 15. You can also see the same thing regarding EBITDA for the EV to EBITDA multiple. In all likelihood, the company should trade toward the lower end of this range. But even in that case, EBITDA is already where it needs to be, while operating cash flow is off by only $177.1 million. Using the adjusted figures, this is a fraction of the $435.9 million improvement that was seen from 2022 to 2023.
Given this, as well as the improvements that we have seen in the industry, with higher ticket prices and attendance levels rising at a respectable clip, I came into this article fully prepared to upgrade the stock to a ‘hold’. But there is one thing that has caused me to take a more cautious approach. This is the fact that the box office for this year is likely to be awful. According to one source, there should be 120 wide releases shown in box offices. This is down from the 150 that the same source calculated for 2023. And if we ignore the pandemic years of 2020 through 2022, it would be the lowest that the industry has seen since the 120 back in 2013. But it's not just releases as a whole. It's also releases from the major six film studios that make up most of the box office revenue. That number is expected to be 62 this year, down from 67 last year. And if we ignore the three or four mentioned pandemic years, it would be the lowest from the major 6 studios on record dating back to 1995.
Another source, Deadline, uses a different definition of what constitutes a wide release. And it sees this number falling from 124 back in 2023 to 107 this year. All of this has been caused from the WGA and SAG-AFTRA strikes that occurred last year. And according to some estimates, the weak box office slate could result in a $2 billion hit to the industry for this year as a whole. Now obviously, there's always a chance that the films showing could have better than expected results. If this comes to pass, AMC Entertainment could see its results continue to improve. But the odds are certainly stacked against them in that regard.
Takeaway
In my view, AMC Entertainment is already making some really impressive progress. But it's not where it needs to be just yet. If the firm can improve its financial results to become cash flow positive, or if the stock falls much more from here, it could become worthy of another upgrade. Even if neither of these occur, if the business can at least make it through this year, it could be setting itself up for what might be a permanent rebound in 2025. At that point, I think it may make more sense to consider diving in. But for now, I wouldn't be surprised if shares continued to underperform the broader market, leading me to reiterate the ‘sell’ rating I had on the stock previously.
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