- Between AMC and CNK, which is the better movie theater stock investment?
- AMC punished shareholders with dilution and high yield debt.
- AMC had the opportunity to create shareholder value by paying off high interest debt with expensive equity, yet curiously decided against it.
- CNK left 2020 with significantly less damage and no dilution.
- I give my final verdict between the two stocks based on fundamental analysis.
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With vaccinations continuing at an accelerated pace, readers may be looking for a way to invest in movie theaters. AMC Entertainment (NYSE:AMC) and Cinemark (NYSE:CNK) are the two largest publicly traded operators of movie theaters in the United States. Both companies were hit hard by the pandemic, but due to CNK having maintained a more conservative leverage profile, the company was able to escape the punishment that AMC inflicted on its shareholders just to stave off bankruptcy. In this article, I compare the fundamentals of both companies and give my verdict as to which is the better movie theater stock.
AMC Stock Price
AMC stock trades around $10 per share, at a higher level than it did prior to the pandemic.
AMC is the largest theater operator in the world, as it operates 950 theatres in 14 countries including 590 theatres in the United States.
2020 was rough to AMC, as the company swung from an adjusted loss of $112 million in 2019 to an adjusted loss of $1.9 billion in 2020. Adjusted free cash flow swung from positive $358 million to negative $1.2 billion. In order to fund the negative cash flow, AMC had to increase shares outstanding 330% to 450 million shares. As of the latest quarter, long term debt had increased by approximately $1 billion to $5.7 billion, while cash on hand has increased by approximately $800 million to around $1 billion. While net debt did not increase significantly (due to equity offerings), much of the new debt came at high double-digit interest rates, including $100 million of 15% senior secured 1st lien debt due in 2026 issued in January of this year. Based on 2019 adjusted EBITDA of $771 million, AMC has a debt to EBITDA multiple of 7.4 times or net debt to EBITDA multiple of 6.1 times.
Since the end of the quarter, AMC has asked shareholders to approve a 500 million increase to its share authorization, which it has subsequently retracted and replaced with a 43 million at-the-market offering. I view the retraction to be negative for shareholders, as AMC had the opportunity to create shareholder value by paying off high interest debt with expensive equity, yet curiously decided against it.
CNK Stock Price
CNK has recovered strongly from 2020 lows, but maintains 50% upside to pre-pandemic levels.
CNK operates 531 theatres in 16 countries. CNK is the third largest exhibitor in the United States with #1 or #2 market share in 80% of its top 25 markets.
2020 was not kind to CNK, as the company swung to a net loss of $616.8 million versus a net profit of $191.4 million in 2019. In contrast with AMC, CNK did not materially dilute shareholders, as shares outstanding increased 0.05% to 116.667 million. Net debt increased slightly from $1.31 billion to $1.74 billion.
Since the end of the quarter, CNK issued $405 million in 5.875% senior notes due 2026, which it used to redeem 83.5% or $333.99 million of its 5.125% senior notes due 2022. While interest rates increased in the exchange, I am none the less impressed by the 5.875% interest rate on the new notes.
Based on 2019 adjusted EBITDA of $745 million, CNK had a debt to EBITDA multiple of 3.2 times, or net debt to EBITDA multiple of 2.3 times. CNK estimated its 2021 monthly cash burn to be around $65 million, suggesting that its debt to EBITDA should end up somewhere in between 2.3 and 3.2 times by the end of 2021.
Is AMC Or Cinemark Stock The Better Buy?
While both AMC and CNK saw substantial hits to their businesses as a result of the pandemic, they have left 2020 with vastly different balance sheets. CNK's leverage is less than half of that of AMC. Not only that, but AMC diluted shareholders by over 300% while CNK did not. CNK was profitable in 2019 while AMC was not. In 2019, CNK's average ticket price was $6.81 versus $9.47 for AMC, suggesting that CNK may have more room to raise prices. Yet CNK stock remains much lower than pre-pandemic levels while AMC is somehow higher than pre-pandemic levels.
With AMC, I view the possibility of bankruptcy reorganization to be very high due to leverage and my doubt that the company can be profitable beyond the pandemic. Perhaps the only thing going for AMC is the potential for a short squeeze, as short interest is above 20%. However, I do not believe counting on a short squeeze to be a profitable endeavor on a consistent basis.
Even if it escapes bankruptcy, AMC's valuation is concerning. On an EV to EBITDA basis, AMC is trading at 11.5 times 2019 numbers.
CNK, on the other hand, trades for less than 6 times EBITDA. Critically, it is important to note that AMC's high interest debt may prevent it from generating positive earnings post-pandemic. CNK is trading at just over 13 times 2019 earnings. While I am skeptical that theater attendance will ever return to 2019 levels, I expect that CNK may be able to make up for it with increases in ticket prices. Based on the approximately $200 million in annual free cash flow that the company generated in 2017-2019, I expect the company to be able to reduce net debt to pre-pandemic levels within 2-3 years. Relative to AMC, CNK is clearly the better investment. However, I cannot recommend buying CNK at these levels, considering that the 13x earnings multiple does not adequately compensate for secular risk to the theater industry.
AMC and CNK are two giants in the movie going business, but it is primarily their balance sheets that make the difference in my assessment of their stock prices. AMC entered 2020 with a highly levered balance sheet, which forced it to aggressively dilute shareholders just to stave off bankruptcy. CNK entered 2020 with a reasonably leveraged balance sheet, which enabled it to leave 2020 without having to dilute shareholders. Between the two, CNK appears to be the better bet from a fundamental perspective, though AMC seems to be getting more attention from short squeeze investors. I am neutral on CNK and rate AMC a strong sell.
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This article was written by
Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.
Analyst’s Disclosure: I am/we are short AMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am short AMC through put options.
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