Shares in US cinema chain AMC Entertainment (NYSE: AMC) have risen by 588% to $31 over the last year. Investors who bought and sold their AMC stock at the right time may have enjoyed life-changing gains.
However, the AMC share price has fallen by 50% since the start of June. This popular meme stock no longer appears to be heading to the moon. Today, I’m asking whether this slump could be a buying opportunity for me — or a warning to avoid AMC.
Back in business
AMC — which is the world’s largest cinema operator — released its half-year results last week. Chief executive Adam Aron said that the group’s financial results for the three months to 30 June were “considerably well ahead” of expectations. High-margin food and drink sales were also said to be strong as guests “splurged” on their return to the movies.
In reality, I think it’s too soon to predict how long it’ll take the industry to make a full recovery. Most AMC cinemas have only been open since the start of June. But what I can do is to take a look at the company’s numbers to check on progress.
Good results, so far
AMC generated revenue of $445m during the second quarter, thanks to 22.1m cinema visitors. To see how this compares to more normal times, I looked up the numbers for the second quarter of 2019. These show revenue of $1,506m and 97m visitors.
Based on these numbers, AMC’s second-quarter performance this year doesn’t seem too bad to me. With most cinemas only open for one month in the quarter, the group generated almost one-third of the revenue it earned during the equivalent three-month period in 2019.
Of course, AMC’s still losing money. Last week’s numbers showed a $344m loss for the second quarter. Analysts expect these losses to continue. The latest consensus forecasts suggest the group will report losses in 2022 and 2023, even as sales recover.
However, I think there’s a much bigger risk that potential investors like me should worry about.
AMC stock: my verdict
In last week’s results, Aron said the company had available cash of “more than $2 billion” — more than at any point in AMC’s 101-year history.
One reason for this is that he was smart enough to take advantage of the meme stock rally to sell new AMC stock at high prices. But the group still has net debt of $3.7bn — and the number of AMC shares in circulation has risen from 104m to 480m.
This is important because it means future earnings per share are likely to be much lower than in the past. For example, the last time AMC reported a profit was in 2018, delivering earnings of $0.91 per share.
If AMC generated the same level of profit today, I estimate these earnings would fall to just $0.19 per share. With the stock currently trading at $31, my sums suggest the company is trading at 160 times its peak earnings from the last five years.
I don’t see any reason to expect AMC to be more profitable in the future than it was pre-Covid-19. So the shares seem far too expensive to me. In my view, AMC stock is likely to fall further. I think a return to $60 is very unlikely and I’m not buying.