AMC Entertainment (AMC) is one of the world's largest movie theatre companies. As of September 30th, 2013 the company had a total of 343 theatres with dominant share positions in major metropolitan areas such as New York, Los Angeles, Chicago, Philadelphia, and Dallas. The company just completed its IPO a couple of weeks ago, which was at $18 per share. In an interesting and unusual move, members of the AMC Stubs customer loyalty program were able to participate in the IPO.
Currently, shares of the company trade just over $20, with shares breaking out of the IPO high on Friday. At a price of $20.14, the company is valued at $1.91 billion. At this level, it seems that AMC is undervalued relative to its industry peers.
Over the past few years, AMC has gone through a significant strategy change. Historically, the movie theatre business has been all about quantity and packing as many people as possible into the movie theatre. AMC is taking a counterintuitive approach and now focusing on more comfort and convenience in its movie theatres. They have begun theatre renovations that replace traditional theatre seats with plush, electric recliners that allow customers to fully recline at the push of a button. The renovation process typically involves losing 66% seating capacity. For an industry historically focused on quantity, this reduction in seating capacity could be viewed as counter-intuitive and harmful to revenues. However, the quality improvement in the customer experience is driving, on average, a 91% increase in attendance at these locations. AMC has already renovated 28 theatres and has another 65 currently under construction. At the theatres that have already been renovated, the company has averaged 100% cash on cash returns. This is due to being able to charge a premium for these upgraded seats. AMC has also implemented a reserved seating program in 50 of its theatres that charge a premium to customers to choose their seat in the theatre ahead of time.
In addition to premium seats, another focal point of their strategy is to offer enhanced food and beverage options. At the center of the strategy is the new concept of MacGuffins Bar and Lounges. MacGuffins features beer, wine and liquor and according to the company has won over the adult movie goer. AMC creatively markets new themed drinks that tie in with current movies such as the "Rum Burgundy" that tied in with the launch of Anchorman 2. The company had deployed 45 MacGuffins, with an additional 23 locations coming in the next 12 months. AMC estimates that MacGuffins has an impressive average food and beverage per head total of $0.30 and over 100% cash on cash return.
In addition to MacGuffins, the company has also focused on adding less traditional options to complement the traditional popcorn and soda at its concession stands. Patrons can now purchase made-to-order hot foods, espresso drinks, smoothies and healthier snacks. AMC has started offering these selections at 80 of its locations. They are also expanding their offering of Dine-In Theatres. Currently, the company operates 11 Dine-In Theatres and plans to open 20 more locations over the next 5 years.
AMC also is investing in premium sight and sound formats. The company is the world's largest IMAX exhibitor with 136 screens, which is almost twice the amount of its nearest competitor and represents 44% of the IMAX market share in the United States. They are also expanding their own large format offering, ETX, which currently has 15 screens. These 151 combined IMAX and ETX screens are only 3% of their total screens, but can take in as much as 19% of their weekend box office when a blockbuster movie opens. This is because their pricing premiums for IMAX and ETX average $4.09 per patron.
AMC believes that their ability to bring innovative concepts to market and generate incremental revenue is one of its competitive advantages. Finding new ways to generate incremental revenue is key in the movie business. The premium seating, enhanced food and beverage and large screen formats are excellent ways that the company can generate incremental revenue in the future. With these features only appearing in a fraction of its 343 total theatres, there is plenty of room to grow these concepts and generate more incremental revenue down the road.
Long Term Debt**
* First 9 months of 2013
**As of quarter ending September 2013.
***AMC is planning a $0.20/quarter dividend
Source: AMC Prospectus, RGC and CNK financial statements
Taking a look at the chart, it looks like all 3 companies are comparable with a revenue, debt and yield stand point, yet Cinemark trades at almost double the market cap as AMC and Regal over a third. It should be noted that AMC plans to pay a dividend of $0.20/share every quarter according to its prospectus, but has not issued and may not issue any dividends depending on the nature of the business. If they indeed issue a $0.20/share dividend per quarter, the yield would be very comparable to its competitors. AMC also plans on using the proceeds of its IPO, $359.1 million, to retiring some long-term debt.
Despite the risks that AMC might have, the upside potential for the stock definitely outweighs the downside risk. At its current market cap, it trades at a huge discount to its peers. It should also be noted that just the other year AMC was purchased by Wanda Group for $2.6 billion. During the time after the purchase, the operating results have swung to a profit from years of losses. However, the company only trades at a market cap of $1.9 billion now. If you believe in the strategy that AMC is undertaking will improve the bottom line, then shares look extremely attractive at this level. Another competitive advantage that AMC has over its rivals is that they have a brand recognition that is the best in the business according to Ipsos Survey conducted in 2012. They also have strongholds in large cities where there are scarce opportunities for competitors to move in and take market share. These customers are also less sensitive to price changes.
Movie theatre stocks have been on fire in 2013 with Regal being up nearly 40% and Cinemark being up about 30%. If AMC can continue to execute on its strategy and deliver better financial results, shares should enjoy a run up similar to its competitors to get its valuation more in line with its peers.
Additional disclosure: All investors are advised to conduct their own independent research into individual stocks before making a purchase decision.