|Shares Out. (in M):||131||P/E||0||0|
|Market Cap (in $M):||3,246||P/FCF||0||0|
|Net Debt (in $M):||4,583||EBIT||0||0|
AMC Entertainment operates the largest circuit of movie theaters in the United States, Europe, and the world. Theatrical distribution is a misunderstood, often-doubted industry that is in fact a durable, quality business. In my opinion all the exhibitors are likely solid medium-term investments, but AMC has the greatest idiosyncratic opportunities on which to capitalize in the short- and medium-term.
On top of that, the recent dislocation in AMC shares looks technical rather than fundamental, with AMC down almost 30% year-to-date while almost every other exhibitor worldwide is up in 2017. Any attempt to undermine an AMC investment case (and explain the large drawdown) with an industry-wide thesis fails if it does not explain why Regal and Cinemark (among others, globally) are year-to-date winners.
It is worth reading mimval's writeup on CKEC and the message board to understand sources of accretive value from all three recent M&A transactions that have essentially doubled AMC's size and will be low-hanging fruit to drive EBITDA growth in coming Q's.
I believe AMC can realistically double within a year and perhaps triple in three years.
AMC was historically a domestic theater circuit, the second largest in the United States. It was purchased by Wanda Group in 2012 and brought public again in late 2013, though Wanda still controls the company through supervoting shares.
AMC’s strategy is to premiumize the theater experience and grow their scale globally. They are spending a large sum of growth capex to upgrade their theaters, primarily deploying recliner seats in a targeted 60% of their footprint (they have about 35% of legacy theaters deployed already). The company has repeatedly stated this capex generates well above their 25% IRR hurdle rate, and I have no reason to doubt this is true as all other exhibitors have echoed the immense returns of recliner seat deployment. They have also upgraded their concessions in terms of quality and purchasing experience, helping drive per patron concession spend up at a 5-6% CAGR for the last few years as they take price, offer higher end products, and increase take rates.
In the last twelve months AMC purchased three companies, growing from the second biggest circuit domestically to the largest in the USA, Europe, and the world. These chains included Carmike (the fourth largest domestic circuit), Odeon (the largest in the UK and mainland Europe), and Nordic (the largest in Scandinavia).
AMC is operating in a steady industry that, despite decades-long rumors of its demise, grows cash flows by increasing monetization per patron faster than the very, very slow pace at which it is secularly losing patrons. Most people are surprised to learn that since 2000, despite all the new in-home entertainment offerings that came out over that period (HDTV, Blu-Ray DVDs, Netflix, etc.), the 17-year CAGR of attendance declines in US moviegoing are less than 1% per year. With ~2-3% annual ticket price increases and ~5-6% better food and beverage spend per patron, it is not hard to see how AMC can still achieve ~3-4% “same-store sales” over a long period of time. The mostly fixed cost nature of the business translates this revenue growth into HSD EBITDA growth, and the financial leverage turns that into significant growth in free cash flow to equity.
At the moment, this economic model is even more exciting than usual, as AMC is deploying an enormous fraction of this free cash flow into the recliner initiatives which are returning well above their cost of capital. They have this opportunity domestically for probably two more years, and then can turn attention to Odeon, a formerly private equity-owned circuit which, by all accounts, was criminally underinvested and should have great opportunities to pick low-hanging, first-mover fruit.
While many sell-side analysts have taken down multiples recently to the lower end of historical ranges, I feel the company has perhaps its best ever opportunities for excess returns from capital deployment, and should therefore deserve the higher end of its historical multiple range.
At their series of investor days earlier this year, the company revealed it did $887mm in pro forma 2016 EBITDA, including all acquisitions except Nordic. Including Nordic, adjusting for the year-on-year decline in the GBP (which impacts Odeon’s EBITDA in translation to USD), and removing their NCMI distributions, I come to almost exactly $900mm of true PF 2016 earnings power for the underlying business.
The company laid out a long-term target of 8-9% EBITDA growth at IPO, but the dramatic acceleration of high-returning growth capex should help them beat that figure in the near-term.
As a result, without taking any view on box office, I believe that the company can easily meet and likely exceed its long-term 8-9% EBITDA growth targets that have been laid out since IPO. Two years of 12% EBITDA growth takes 2018E EBITDA to $1.13bn.
Historically, these businesses have traded in a range of 7.5-8.5x EBITDA. As stated, I feel the high-return growth capex opportunity makes this perhaps the best forward-looking opportunity to own theaters in a long time, so I use the high end of this range, 8.5x for the domestic businesses. Approximately 30% of the business is in Europe today, where all the public comparables trade for >11x EBITDA. I take 11x for the European business. Blended, this comes to 9.25x.
9.25x on a $1.13bn EBITDA figure comes to $10.5bn in EV. Net debt today is $4.6bn, leaving $5.9bn for equity, which on 131mm shares comes to $45 per share, or 80%+ upside from today’s levels.
Technical overhang should dissipate as new shareholder base gets reestablished
While thesis isn't reliant on box office view, we do expect a strong 2017 slate to eliminate fears of secular transition away from exhibitors
|Subject||thanks for the idea.|
|Entry||06/04/2017 10:24 AM|
a few questions. 1. can you talk about the FCF dynamics? Capex mnt? Capex growth? what's the FCF yield?
2. What does the business look like in 10 years? I know that's a tough question and I may not be the right demographics but in my mind this is a dying business long term but maybe I am totally wrong.
|Subject||Re: thanks for the idea.|
|Entry||06/05/2017 01:45 PM|
Ray did a pretty good job but I'll add a bit:
1- Maintenance capex is around $150mm or so, per the CFO commentary at the B. Riley conference last week. So 2018E EBITDA - Maintenance Capex could be ~$1bn even. Pay your interest and pay your taxes and this is creeping close to the ballpark of $4 of free cash flow (before growth capex) on a $25 stock. For now, essentially all of that free cash flow is being invested in growth capex, mostly the recliner initiatives. These are generating "well above" their 25% hurdle, and you can ask Cinemark, Marcus, Regal, Reading, or anyone else in the space and they won't dispute the huge returns. It might not last forever, but I believe AMC will pull back when the returns are no longer there. In the meanwhile, I'm totally thrilled to have my free cash flow yield of ~15% being invested at a 25%+ IRR. The debt is significant but manageable - the business is somewhat acyclical and could delever fast in a problem situation by cutting the growth capex.
2- To look to the future, consider the past. 10 years ago there essentially was no Netflix, today it has 50mm domestic accounts. Over those 10 years, we lost about 6.5% of tickets sold (2007-2016). Pretty controlled decline. I doubt very much if 10 years from now Netflix can be MORE impactful, i.e., do better than adding ANOTHER 50mm domestic accounts, if only because that performance would bring them to ~100% of pay TV households. I don't expect the business to all of a sudden become the new sexy growth industry, but to the extent the business is dying it's the same way you are dying - every day brings you a little closer, and there's always a chance you get hit by a bus, but it's not particularly imminent. And we aren't investing in a melting ice cube, because we believe cash flows are actually growing nicely even during the controlled decline, so it's not about making money during the winddown of a once great asset. Serving up a higher quality, higher margin, premium experience to slightly fewer customers is a good business model.
|Subject||Re: Re: thanks for the idea.|
|Entry||06/05/2017 01:55 PM|
One thing that I think is interesting is the possibility that the theaters start to show Netflix movies (and Amazon), allowing the consumer a choice of where to watch. The theaters have so far vehemently resisted this. But part of the problem in the U.S. theatrical business is that the theaters do not have enough product-and they do not have enough variety of product. There is a tremendous amount of idle capacity in the theaters.
As the economics of mid-budget films have become challenged, the studios are making bigger tentpoles and fewer of them. That is creating an opening in the market for Netflix and Amazon to make character-driven mid-budget films. If the theaters would carry these films--and then use digital marketing to efficiently reach customers who might want to see them--possibly offering deals and then signing these new customers up for loyalty programs and introducing them to the theatrical experience--it is possible that attendance could actually increase. As this is effectively a gross margin dollar business where the more turns of popcorn sold, the better, then driving more traffic to theaters by including a greater variety of movies could make the entire ecoysystem healthier and could grow the overall box office and interest in movies. My worry is that a younger generation will not have a strong interest in theaters because the theatrical experience is not on-demand and is becoming somewhat commoditized with superhero and animation driving the business (not suggesting the films are commoditized--only that people that are not fans of these genres may not have a reason to go to the movies).
If the theatrical experience (i.e. sound/screen/crowd/out-of the house) is the point of differentiation, then the theaters should show Netflix films because the person that wants that experience will need to go out to get it. It makes sense that theaters want to protect the windows--but you wonder how much more moviegoing could be driven by showing a greater variety of films-which are going to have to come from other sources. It seems to me that a steady supply of new and diverse product 52 weeks a year would be good for the business. That supply is going to have to come from outside the major studios.
If that does not happen, then I agree that the model is probably going to keep moving in the direction of a few tentpoles driving most of the business because the effects-driven spectacle film benefits the most from the big screen presentation. I don't think it is particularly healthy for the theater industry to rely on a few film franchises and studios for the majority of their volume. But it may go that way. In that case, the companies with scale would probably benefit, AMC being the leader. Theaters will need to offer a compelling reason to leave the home and the companies will scale in screen format, food selection, comfort, theater size will have an advantage (my comments are confined to the U.S.----many international markets are healthy and growing).
Another issue that I don't get which is very complicated but potentially a source of opportunity for theaters is dynamic pricing. Certaintly theaters could raise prices for a Star Wars film on opening weekened, versus a smaller independent film in its second week of release showing at 2pm of Tuesday.Today, those two tickets cost the same amount. If the theatrical business moves toward spectacle and effects and global brands driving more of the traffic, it makes increasingly less sense for theaters to have pricing parity across the slate. Digital technologies may augment the ability to create dynamic pricing. Certaintly it would need to be done very gently because people hate price increases and are conditioned to pay for movie tickets a certain way. But it seems like Disney and AMC are both leaving money on the table by not raising prices for the true event pictures on opening weekend in amazing theaters with the latest technology in a way that a rock band would be leaving money on the table by not charging more for front row seats. There would be a lot of complexity in the implementation of that---but it makes more sense now than it did ten or twenty years ago as the spoils increasingly concentrated in the very expensive big-budget effects movies. What Disney is putting out almost belongs in a different product category than the movies from the 90s. Disney has created a branded movie slate that is almost as reliable as a predictable consumer staple franchise.
I don't think windows or VR are the threats. The threat is the studios not making movies that large and growing numbers of new customers feel like they need to see in a theater. The industry needs to figure out how to get together in a way that supports risk-taking, new types of films, a more diverse slate of films, and a consumer-friendly experience from the momemt of intent to see a movie to the time you leave the theater.
|Subject||Re: Re: thanks for the idea.|
|Entry||06/05/2017 02:33 PM|
Millennials hate going out, i am told. not safe. plus the box office product stinks, all the action is in TV. that may be cyclical, but it may be secular.
could this not be like retail / restaurants? for years we all knew there were too many QSRs adding locations far too fast, about a year ago consumer spending at bars/restaurants surpassed that of grocery stores for the first time. even more obvious was the bricks and mortar retail situation. but with eating out, that kind of hit all-of-a-sudden last Fall, and i would argue that was like the saying about going broke ... slowly then all-of-a-sudden. i still can't really figure out why it happened when, other than i thought it eventually would.
i understand it's a demand question here (vs. largely supply with restaurants, and vs. online shopping threat with retail), but in the end it's all the same: fixed plant, high capex (i think higher than they say), cable / regional casino levels of leverage (4-5x), and isn't the future here at least murky?
as an anecdote, which i usually shun in favor of actual data, but why would i ever go to a sticky-seat movie theater, overpay to be told when to sit and watch; when i have an 80 inch TV and a crazy surround sound system that is 10% the cost it was 10 years ago. plus a fridge filled with cold ones / soda / ice cream, etc. for what, to go see Wonder Woman? the risk of this group having another big leg down is too high for this price, IMO. it could very well be in the early stages of long decline.
|Subject||Re: Re: Re: thanks for the idea.|
|Entry||06/05/2017 04:33 PM|
I hear your argument. I would argue that movie theaters are selling impulse satisfaction more than anything. The in theater experience should be great. But when the marketing of a movie is effective--and the movie is good---people will leave the house to see it and they will tell their friends to see it and social media will create a wave that carries the movie for several weeks. We have seen this with a variety of hits in the last few years---Deadpool-Get Out-Split-Sing. Films that did not have big built-in awareness from preexisting IP--but effectively created an impluse to get out of the house on the weekend through brilliant marketing and then delivered with a satisfying movie. I believe that impulse is fairly strong and can be sustained---if the studios can put out product that encourages people to leave. But if all the movies start to look the same---or feel familiar--the audience will get smaller over time. Some of the problems with the theatrical experience (e.g texting-rigid scheduling-rude neighbors-sticky floors---) are very difficult to solve. But if the movie is great--and the viewer spends two hours immersed in a story--that should override the other problems and keep people coming back. (not saying that they should not attempt to fix those problems).
The problem in my view is that these types of movies require risk. Original stories-different characters-atypical narrative structure----to give people something that they have not seen---the studios must take risk and often they are going to fail. Structurally they are not set-up to fail a lot because they are part of public companies that need to grow earnings, sell toys, and fill theaters in China. The opporunity cost of huge miss is meaningful for the studios. You cant blame the studio executives for opting to recylce old IP and franchises. But eventually, and it is hard to predict when, the audience will get tired of it and the willingess to pay a premium price to see a film that you feel like you have seen before will diminish. That could take a long time. But, in my view, that is why the incremental cap-ex that theaters put in is going to be less of a driver of the economics than will the quality of the films that the studios put out. Movies that make people feel like they have to leave the house to see something great and be part of a conversation.
For someone that loves movies, you have to deeply appreciate what Amazon and Netflix are doing. They are opening up incredible access to films that a lot of people would never get to see because digital distribution with subscription support allows it. This is going to create a lot of intangible value in these brands--value that the studios (save for Disney) never built because they did not control the customer relationship. It is pretty incredible how long the majors have been in the business--how much joy they have delivered--and how little brand equity that have built in the process. For most people, an MGM or Paramount movie does not mean anything.
One of my worries on this investment is that the multiple is going to contract because of the uncertainty associated with windows and streaming. That creates a tough set-up for a leveraged equity will variable earnings, even if the multiple only contracts a little bit. I could see these staying range-bound for some time. I am not sure Wanda entered the movie business because they actually like the economics. And you hope Adam Aron does not leave because he is great.
|Subject||Re: Re: thanks for the idea.|
|Entry||06/05/2017 04:52 PM|
thanks. 2 more. you say that the price decline looks more technical than fundamental. what do you mean? also the company talks about 25% cash on cash returns on these renovations. is that truly cash on cash, after tax and capex or is it EBITDA / investment? thanks so much.
|Subject||AMC as a Brand|
|Entry||06/06/2017 02:28 PM|
I used to love going to movies and now hate the experience for a lot of reasons cited here, not comfy like home. loud kids on phones, not safe, screens are often smallish...
AMC is a differentiated brand. lie almost falt seats. decent food and wine. Their rewards program affers great value.
That said, its a roll up now that paid a lot for deals and with chinese owner that may not have making $ as top priority and a lot of debt and secular issues.
|Subject||My 2 cents|
|Entry||06/06/2017 03:04 PM|
I recently got involved again in AMC after a long time away. I think this is a stable, albeit lumpy qoq, business where the secular threats are signficantly over-discounted and investor sentiment is prone to wild swings. The May selloff looks to me primarily technical, and I think a bounce back to above $30 is a low bar. First, there's a bit of sell-the-news dynamic after a string of deals that had the stock strong bid all of last year. Second, there was over-blown concerns around 1/2 of Terra Firma's shares coming off lock-up on May 31. Third, AMC recently sold stock in a secondary, likely leaving some uncommited holders with stock. Fourth, a number of PVOD headlines have hit, and whether suggesting yes-PVOD or no-PVOD, the stock always reacts negatively to these headlines (the mere subject is toxic for stock performance). Fifth, see AMC stock performance versus peers CNK/RGC. Lastly, all of this, in a levered stock, with a heavy HF/platform holder base = messy trading.
That's not to say that the fundamental story is perfect. 2Q box office has been pacing slightly weaker than street. Mgmt should not have bought Nordic with its leverage so high, nor been so vocal about its intent to use NCMI stock as currency. Their capex plan is also too aggressive, even with the strong ROIs they're seeing - deleveraging needs to be their top priority right now. However, this can all be remedied by a more conservative posture to capex and a long pause in deals until leverage is back inline. I believe mgmt understand this and will reduce its capex plan on the 2Q call. The CEO just bought $250k of stock.
All the debate about PVOD and the decline of theatrical exhibition is overdone. A PVOD window is unlikely to arise in the foreseeable future, because there's not even consensus amongst the studios as to how to manage this (e.g., Disney doesn't even want PVOD). Also, exhibition is a consolidated industry and each of the big 3 will boycott any film that tries to go PVOD day-and-date. Big budget films can't afford to lose the theatrical window. US attendance isn't growing and may be in slow decline, but it's essentially been in the same 1.25-1.4mm range for >10 years. The slate should be supportive for the next few years at least.
Ultimately, I see AMC trading at an attractive valuation, and has upside into at least the high-$30s as the multiple reverts to a more appropriate range.