US cinema chain AMC Entertainment (NYSE: AMC) has seen its share price rise by 130% since 26 May. As this is a volatile, fast-moving stock, the picture may have changed by the time you read this. But as I write, AMC’s share price is up by a staggering 633% over the last year.
On Tuesday, AMC raised $230m by selling new shares. The company plans to “go on the offence”, using the cash to buy small cinema chains that are in difficulties due to the pandemic. Does this optimistic outlook mean that there’s still time for me to consider buying AMC stock?
A quick flip
Buying up smaller cinema operators could be a good way for AMC to boost its market share. The big chain will probably be able to operate the new cinemas at a lower cost than their previous owners.
I think the outlook for AMC is probably better than I would have predicted a year ago. However, I do still have some concerns.
In this week’s fundraising, hedge fund Mudrick Capital bought $230m of new shares from AMC at a share price of $27.12.
News of the deal helped push the stock higher, as retail traders piled in. According to press reports, Mudrick had sold all of the new shares within a few hours, flipping the stock for a quick profit.
Of course, there’s nothing wrong with this. But it does suggest to me that Mudrick Capital’s founder, Jason Mudrick, may not expect AMC shares to keep rising.
Who owns AMC?
Mudrick isn’t the only big investor who has been selling AMC stock. The cinema group’s top shareholder since its 2013 IPO has been China’s Wanda Group. But Wanda sold its remaining shares during the week ending 21 May.
As far as I can tell, AMC doesn’t have any really big shareholders, except index tracker funds run by Vanguard and Blackrock’s iShares business. Index trackers can’t choose what to buy — they have to buy the stocks in the index they track.
My analysis suggests that the vast majority of AMC shares, including those sold by Mudrick Capital, are now owned by private investors.
AMC share price: buy, sell, or hold?
To estimate a ‘back to normal’ valuation for entertainment businesses, I’m looking at companies’ earnings for the years before Covid-19. In this case, it looks like AMC may already have had problems before 2020.
In 2018, the company reported a net profit of $110m. In 2019, costs rose, and AMC reported a loss of $149m.
Assuming that AMC can return to 2018 levels of profitability, then at current levels the AMC share price values this business at around 92 times earnings.
For me, that’s just too much. AMC’s tickets sales were flat from 2017 to 2019. I can’t see any reason to expect cinemas to return to rapid growth. In addition, AMC still has net debts of around $5bn, which cost $311m in interest last year.
The latest broker forecasts also look downbeat — analysts expect the company to report further losses in 2021, 2022, and 2023.
I could be wrong about this business. But in my view, AMC shares are overvalued. I won’t buy the shares and if I held them, I’d think about selling.