AMC Stock is not the best cinema recovery investment

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I have repeatedly summarized all the reasons why I am skeptical about investing in cinema. But even if you assume that movie theaters are a good long-term investment, AMC Entertainment (NYSE:AMC) the stock is not the best stock to buy.

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If you want to bet on even stocks, AMC stock will definitely be a fun time. AMC’s “Monkey Army” is big, very funny and extremely active on social media.

But if you want to make a smart, long-term investment in a movie theater takeover, IMAX (NYSE:IMAX) is your best bet.

Cinema numbers

It doesn’t take a long time to show that cinema is a bad investment. Forget the pandemic. Total domestic box office sales in the United States in 2019 were $ 11.32 billion. In 2016, total US box office sales were $ 11.37 billion. From 2016 to 2019, AMC averaged an annual net loss of $ 103.6 million.

Movie theaters will not disappear. Going to the movies is a fun experience every now and then. The problem is, people have more and more impressive HD smart TVs in the home. There are more streaming platforms delivering original content than ever before.

AMC stock bulls believe in the return of movie theaters. I am sure theaters have bounced back and will continue to rebound from the pandemic numbers. The million dollar question is will it continue to grow over time? What are they ever doing back to 2016 levels?

Of course, people will continue to go to the movies. People who went to see four movies in the theaters a month could see two or three a month by 2023 or 2024. I’m not predicting the end of the movie industry. But a 25% to 50% drop in income is a major problem for AMC stock investors.

IMAX stock on AMC

Suppose for a minute that you ignore Netflix (NASDAQ:NFLX), Disney (NYSE:SAY) and all other streaming services. Suppose you want to bet on movie theaters. To me, that is like ignoring Netflix in 2016 and betting on Blockbuster Video. But suppose you believe the future of the entertainment industry is in movie theaters.

Macquarie Research Analyst Chad Beynon recently released a memo that included a deep dive into the whole movie industry.

In the note, Beynon downgraded AMC stock and had harsh words about its valuation. He pointed out that AMC shares have risen by more than 500% in the past 12 months, while the movie group as a whole has only risen by 11%.

Beynon also said that AMC will not have positive free cash flow until 2023.

“Looking ahead, fundamentals are far from where stocks trade given the company has a deferred rent of $ 420 million (2Q21) on top of its annual rent expenses of $ 1 billion. dollars; normalized maintenance investments are approximately $ 140 million and annual interest approximately $ 420 million, ”Beynon said.

Macquarie has an “underperformance” rating and a price target of $ 6 for the AMC stock.

Instead, Baynon named IMAX as his top pick of movie stocks. IMAX is growing, it has a much healthier track record than AMC, and it’s a lot better value. Over the past seven years, IMAX has increased its total number of screens from 863 to 1,654, Beynon said.

“Additionally, we believe the company’s strong margins and well-capitalized balance sheet support our positive outlook,” he says.

Macquarie has an “outperform” rating and a price target of $ 26 for the IMAX stock.

Do not match trade

AMC’s monkeys won’t care what Macquarie has to say. They sure don’t care what I have to say. They love the stock.

But for people who want to make wise long-term investments, AMC stock isn’t the way to play a movie theater takeover. AMC stock is trading at 28.2 times sales. IMAX is trading at 5.2 times sales. AMC stock has net debt of $ 3.7 billion. IMAX has $ 11.8 million in net debt.

In 2019, AMC generated a net loss of $ 149 million. IMAX generated net income of $ 46.8 million.

To be clear, I would not and have not invested in either of these stocks. I think movie ticket sales were probably in secular decline even before the pandemic. But IMAX is clearly more attractive as a cinema rebound investment in just about every way compared to AMC stocks.

Before concluding, I want to add a disclaimer. Normally I would recommend a pair of trades in which investors opt for long IMAX stocks and short AMC stocks. In this case, I would never sell the AMC shares under any circumstances. The AMC share price disconnected from reality a long time ago. It is now the cult stock par excellence.

Trading AMC stocks at a market cap of $ 24.5 billion is just as insane as it is trading at a market cap of $ 245 billion. Once a stock is disconnected from the fundamentals, it can go anywhere in the short term. Do not short sell AMC stocks unless you are prepared to take very big losses.

At the date of publication, Wayne Duggan did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Wayne Duggan has been contributing to US News & World Report Investing since 2016 and is an editor at Benzinga, where he wrote over 7,000 articles. Mr. Duggan is the author of the book “Beat Wall Street with common sense” which focuses on the psychology of investing and practical strategies for outperforming the stock market.


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