|Shares Out. (in M):||11||P/E||NM||42|
|Market Cap (in $M):||1,396||P/FCF||NM||NM|
|Net Debt (in $M):||5,111||EBIT||288||352|
|Borrow Cost:||Tight 15-50% cost|
AMC is a short because:
a) US box office is about to peak in 2019, for forever
b) its #1 supplier (DIS) is merging with its ~#4 supplier (FOX), significantly increasing DIS’ market share from ~1/4 to ~1/3, which increases film rent expense at AMC
c) major studios such as DIS and WarnerMedia are launching direct to consumer “over the top” movie apps at 2019YE, which should lower the amount of films to be monetized through theatrical in the future, as well as significantly increase the risk of a shortening theatrical window
d) AMC Stubs A-List, its subscription program akin to MoviePass, is cannibalistic to existing sales and burdens the AMC P&L with
e) net leverage at 6x with no deleverage plans, already exhausted all sale leaseback / asset sale options
f) negative FCF for the past few years despite ever record box office environments
Historically, the way to trade exhibitors has been to short them on theatrical window / terminal value concerns causing multiple de-rate (like in 2017 with premium video on demand, and the subsequent subsiding of such concerns on the long side), and on box office numbers revisions (like in 1H18 when it became increasingly clear that Black Panther and Avengers: Infinity War would significantly outperform estimates).
Going into 2019, the trade is to short the exhibitors (both CNK and AMC) trading on peak multiples (8x EBITDA and 7x EBITDA are their historical relative highs) on a peaking US box office that may very well be peak box office – not just for this economic cycle, but for forever. Multiple significant events in 2019 are poised to alter the industry for forever: DIS/FOX merger, studios going DTC – both of which would structurally alter economics for the exhibitors for the worse. For AMC in particular, given it has net leverage close to 6x EBITDA, it’s not too crazy to assume a 1x or more EBITDA contraction if street is convinced that we are indeed facing forever peak box office and a challenged terminal value. As a thought exercise: investors are willing to value challenged cable nets like VIAB and AMCX at ~6.5x EBITDA and broadcasters at ~7x EBITDA despite them continuing to grow advertising and affiliate / retrans revenues for some time until the bundle breaks. Exhibitors trading at 8x (CNK) and 7x (AMC) by comparison are complacently valued. I think once investors realize that exhibitors will peak earnings earlier than cable nets and broadcasters and that the peak year is in 2019 – that would force several EBITDA turns of contraction. The levered play here to express the multiple contraction is AMC at 6x net leverage (vs. CNK at 2.5x). AMC is trading at 7x EBITDA currently. I think there’s a likelihood that equity could be worth close to zero with some multiple contraction.
DIS / FOX: with China approving the merger earlier today, DIS / FOX received the last regulatory greenlight to consummate the merger. With the 20th Century Fox studio under DIS, DIS’ market share is poised to increase from ~1/4 to ~1/3.
Under Disney ownership, 20th Century Fox studio’s output can manage the box office calendar better with Disney so as to stagger hits on nonconflicting times, as well as bargain for a higher film rent split from the exhibitors. See below how a more concentrated office results in higher film rents.
Next, studios such as Disney and WarnerMedia are launching their own over the top apps by year end 2019 as counterweights against NFLX. While tentpole releases are still likely to be shown through the theatrical window, it’s likely that the mid and lower budget movies would not be shown through the box office at all, instead opting via their OTT apps. For example, Disney announced that their “Lady and the Tramp” remake will only be distributed via their OTT app, Disney+, and not through the theatrical window. As we progress through 2019 and 2020, it’s likely that Disney and WarnerMedia would announce an increasingly high amount of films to be distributed via only their OTT. Removing mid to lower budget films from the box office have two negative effects for the exhibitors: a) total gross box office is likely to decline over time as the number of films available at theaters decline, and b) an increasing concentration of films at the box office towards only a fewer number of tentpole films increases supplier power and raises film rents.
Tentpole releases on the other hand are unlikely to shift away from the theatrical window, given theatrical showings monetize better than OTT (if a family of four watches a Star Wars movie, all four members buy $10 tickets each, vs. if the same family watches the film on Disney+ on one $ monthly subscription). However, even such tentpole films are likely to pose a risk to exhibitors over time. Fox’s and Universal’s output deals to HBO are set to sunset around 2022. Given studios are trying to reorient themselves closer to the consumer with an OTT offering, there’s a high likelihood that Fox (via Disney) and Universal would rescind such pay 1 output deals from the market and distribute via their OTT platforms instead. In this scenario where studios are increasingly pulling back their library and output away from third party distributors and making it exclusive on their own platforms, the windowing transforms from:
Status quo: Theatrical > TVOD / DVD > pay 1 > cable / broadcast > pay 2
… to that of…
Possible future: Theatrical > studios’ OTT apps
In this world, the studios are incentivized to shorten the theatrical window as short as possible from the current ~90 days so as to get their latest films into the OTT apps, which the studios recognize as their growth engine in the future. Currently ~80-90% of box office ticket sales are monetized via the first 4 weeks of theatrical. From an economic perspective, there is no reason why theatrical windows need to be 90 days other than the fact that the oligopolistic exhibitors demand it; they know that a shortened window is an existential threat since consumers are much more likely to opt to wait to watch movies at home on TVOD if theatrical windows were shortened to say, 1 month. Studios never had the incentive to significantly shrink theatrical windows (not even during PVOD discussion days). I think 2019 will be the year where studios, spearheaded by Disney/Fox and Warner, finally try to shorten the window to sweeten their OTT’s value proposition.
AMC in particular face additional idiosyncratic issues: Stubs A-List, 6x net leverage with no remaining deleveraging levers, and negative FCF despite record box offices year after year.
Stubs A-List is AMC’s form of MoviePass, where consumers pay $20-22 per month to watch an essentially unlimited number of movies. The economics work like this for AMC: a consumer pays $20 to AMC and watches 4 movies during that month. AMC pays ~50-55% film rents to the studios based on an assumed ~$10 ticket price, or $20 to the studio (4 movies * $10 ticket * 50% film rent). AMC would make zero profit from this consumer. The timing of the AMC’s Stubs A-List launch during summer 2018 coincided with the start of the demise of MoviePass, which started restricting the number of movies consumers can watch per month. While MoviePass bled subscribers, Stubs A-List absorbed those subscribers. These are not high NPV subscribers that AMC wants to take away from MoviePass. These are frequent, negative NPV moviegoers. Additionally, this is a bad trade for AMC. MoviePass pays full ticket fares to exhibitors and AMC experience variable upside with more frequent moviegoers, while under Stubs A-List, AMC takes on the full burden of frequent moviegoers. Management told us during the 3Q18 call that the moviegoing rate has started declining since launching during summer 2018, towards their target moviegoing frequency of 2.5x / month which will help them generate accretive earnings from the program, but don’t be fooled. September and October are the lowest seasonal months for moviegoing. November and December are the highest seasonal months for moviegoing, meaning they didn’t have visibility as to whether moviegoing was declining to a sustainable level during their 3Q18 call held in early November.
Cash flow situation - they haven’t generated any positive FCF over the past 7 quarters (besides the 3Q17 working capital benefit). [looking at this time period because they’ve done acquisitions beforehand]. This is despite 2017 and 2018 being record box office years! How would AMC fare in 2020 and beyond if we are right in that box office peaks for forever in 2019?
Their 6x net leverage is a big issue. They’ve done all the sale leasebacks they could execute. They wanted to sell Odeon, their European cinema business, by IPO-ing a stake during 2H18 / 1H19, to help delever, only to announce on the 3Q18 call that this would get pushed to 2H19 / 2020, if at all, given poor financial performance at Odeon. If poor financial performance is the reason for pulling the IPO, I don’t think the passage of time would help Odeon as studios increasingly go DTC over time and pull films away from the box office.
Lastly, AMC management are not good capital allocators. They recently levered up from 5.5x to ~6x net leverage by issuing a convert to Silver Lake and using proceeds for a dividend recap and repurchased shares from Wanda (to provide them for an exit). Very irresponsible when they have already been persistently generating negative FCF.
Without any more asset sales to help delever from 6x net leverage and a persistently negative FCF profile, faced with a potential forever peak in box office in 2019, suppliers consolidating and suppliers circumventing around theatrical to launch DTC, I think AMC is a compelling short at 7x EBITDA.
DIS/FOX merger, launch of OTP services, time.
|Entry||11/20/2018 09:03 AM|
Good write-up. It increasingly does not make sense for movie studios to spend large amounts of money on production and marketing, compete for opening weekends, and then pull the movie from public consumption for 90 days to abide by the theatrical window. Packaged media likely continues to decline as a source of downstream monetization, and if the value of the movie in the home video market is going to be derived from licensing to SVOD, which I think is increasingly going to be the case, that value will be enhanced if the movie shows up on the platform earlier-i.e. closer to the time that the consumer demand is high-which means the window needs to shrink. In the last week alone, three movie companies (Blumhouse/A24/Paramount) announced that they are going to produce films for streaming platforms (Amazon/Apple/Netflix). Other than Disney, virtually no movie studio has been able to consistently grow its revenue and profit through the model of theatrical distribution due to the unfavorable economics of the theatrical release model for the studios (competing for opening weekend/growing P&A spend/difficulty predicting consumer acceptance of any given title). Now, there are technology platforms that allow studios to monetize their film assets with more visibility--so while they may give up some of the upside in success, I would expect more studios will allocate capital to wholesaling films at a guaranteed margin rather than gamble on theatrical, other than with the giant tentpoles. This is going to drive more product to the streaming services.
I said this on the other thread about AMC, but I don't think it is fully appreciated what a huge strategic shift it is for Disney to pull its output from the pay-1 window (i.e. end the licensing deal with Netflix). Disney makes a lot of guaranteed margin on licensing in the pay-1 window (reported at 200-$300mm per year)----not only does this provide visibility, it also drives more viewing of Disney titles in the lucractive home entertainment market. For Disney to pull this content and make it exclusive to its service, to me increases the likelihood that Disney will eventually go day-and-date, or at a minimum, seek to shorten the window, even with the large tentpoles. You are right about the economics of monetizing Star Wars through four discrete tickets---versus having it be included with the subscription. But I think over the long-term, Disney is going to want to build a large, valuable and global direct to consumer business-----and it is not going to get there without investing a lot of money in new tentpole content. What it will give up in terms of box office, it is going to gain in terms of consumer data and customer lifetime value which will help it build and sustain a subscription business with better economics than theatrical distribution. Bob Iger is not going to signal this today--and the existing model works well for Disney. But the question is whether it can build a better model by going direct to consumer with its highest value content--and I would argue that it can. Wholesaling films to theaters where Disney has no control over pricing, no control over the merchandising of the product, no consumer data all while being forced to window the content is going to become relatively less attractive rather than controlling pricing, controlling merchandising, and having a direct relationship with the customer. Also-with Disney controlling so much of the domestic box office post Fox, it is going to have enormous leverage over the theaters. The theaters are now basically dependent on one supplier for the majority of the best product-which does not seem like a healthy dynamic.
AT&T owning Warner Bros and Comcast owning Universal also support your argument. I am going to be suprised if either of those companies do not work to change the theatrical window given that they both have connectivity businesses that might benefit from access to high-value exclusive film product early in its life. AT&T is going to be unsentimental about this Both companies were distracted this year with deals--but going forward, I don't think either of them is going to be happy with the status quo.
I think this short too often gets framed as movie theaters are going to die, which I don't think is the case. A lot of people will keep going to movies for a long time. But it is not a good business and it is probably going to become increasingly challenged. Attendance will shrink because the model does not accomodate modern consumer behavior (on-demand/total control over experience) and new technologies are going to offer film companies more ways to directly monetize movies earlier in the life of the movie.
|Subject||I'm a convert|
|Entry||11/20/2018 10:28 AM|
I largely agree w/ your short writeup but I will add one more thing that I think the investment community has been ignoring:
When AMC completed it's major mergers in spring of 2017, they put out a deck in June 2017 showing what pro forma the combined company would do based on 2016 EBITDA. It was well over $1b in EBITDA (I think closer to 1.05B because one of the European acquisitions was not included in the number). This EBITDA number included no synergies.
Bulls have argued that EBITDA has plummeted from the 2016 numbers due to theaters being out of commission for cap ex upgrades, amomgst other things. I think not only does this argument not make a lot of sense (it's now been years and theaters go out and then come back in so it shouldn't be a continued year over year hit) but I would argue that the numbers are showing that this "growth" capex which they say brings on huge returns is either not returning anything or just masking a huge decline in the legacy business.
The biggest bear case for AMC is 2018 was supposed to bring a rebound in the box office and it did just that but the numbers are nowhere near the 2016 numbers. I mean 100s of millions below, despite box office being higher than 2016 and a ton of money poured into "growth" refurb cap ex.
The 2nd biggest bear case is Adam Aron is a terrible, promotional, CEO whose capital allocation has been atrocious, as mentioned in this writeup. I'm not sure you can point to one thing he's done that has turned out positive (any of the acquisitions, subscription business, silver lake deal).
I still stand by that box office revenues will be fine for years to come - I just don't think the economics will necessarily be there for the exhibitors. The subscription business has presented a new risk (and opportunity?) that I think is pretty risky given they didn't have studios on board and are paying them under the old method.
|Subject||Re: I'm a convert|
|Entry||11/20/2018 09:35 PM|
I think you are remembering wrong. The June 2017 investor presentation is still on the website and shows (on page 17) LTM as of 12/31/2016 Adj EBITDA of $842 for AMC, Odeon and Carmike before synergies (synergies estimated at $45MM). These numbers do not include Nordic.
The 2016 pro forma EBITDA turned out to be $903.9. So if the business had stayed constant it would be doing $954MM . (904 MM + 45 MM Odean & Carmike Synergies + 5 MM Nordic Synergies).
Capital IQ shows EBITDA estimates for 2018 of 891.
However, AMC did $665 in the first nine months of 2018 versus $652.8 million in 2016. Analysts are expecting EBITDA of only $237 MM in Q4 2018 versus $288MM in 2017 and $251.1 million in 2016. I guess the difference is there is no Star Wars movie in 2018 and there was in 2017 and 2016. But that said, AMC's margins on Star Wars films is lower than other films and box office Quarter to date is running 19% ahead of last year and 16% ahead of 2016. Projections I have seen for 2018 suggest $2.8 to $2.9 billion in box office for Q4 in-line with 2017 and 2016 (at $2.89 and $2.8 billion respectively). So if revenues should be similar and margins higher then analysts estimates are probably too low. My guess is EBITDA comes in around the $950MM 216 #, which wouldn't be great but much better than expectations and 2018 was a mediocre year for Europe (world cup) and many theaters are off-line due to renovations. Also, given the sale lease-backs, rent is not comparable.
I agree that leverage is too high. Once recliner opportunity is captured, the cash should be forthcoming. I do believe they are making a mistake paying a dividend. They should be using the cash flow to reduce debt. But its Wanda's ship, and they want the cash.
I wouldn't totally slam Aron for capital allocation. He did sell $1.05 billion worth of stock in the high 20s/low 30s. The market cap of all the Class A shares now is less than $750 million. So, while the deals may not be obviously a success (yet), the financing of them was.
|Subject||Re: Re: I'm a convert|
|Entry||11/21/2018 08:45 AM|
My bad, I remembered it wrong. I think my memory was from the AMC VIC pitch that expected >1B in EBITDA in 2017 by showing modest growth off of the pro forma 2016 #s. Also you have to include Noridic since today's #'s include Nordic. That would add 10s of millions of EBITDA.
2018 box office will be > 2016. For apples/apples, would need to be the same. Additionally, there have been 2 full years of major growth cap ex spending. 2018 EBITDA will be far below pro forma 2016 adjusted for the small synergies. That to me means the thesis is bust in regards to either the returns on the cap ex or what's happening to the legacy business.
FWIW I am not short. I will just not buy this again, especially with Adam running it. Adam had to do that secondary to finance the acquisitions. If he could have used all debt, he might have done just that! I don't think he gets props for that. But his legacy will ultimately be the result of this subscription business I think.
Re; Den1200: I don't want to speak for author but everyone checks "I do not hold a material position" on VIC posts. I believe they want you to disclose if you own >5% of the company, not if it's material to your portfolio.
|Subject||some more thoughts|
|Entry||11/21/2018 01:57 PM|
thanks for the feedback. and yes agree majic on the comment about legacy business or capex being an issue, given ebitda is flat to down vs 2016 despite much higher capex spend and better box office
also some more thoughts:
the stubs a-list program is causing a lot of noise in the domestic P&L, since attendance outperformed and ticket prices underperformed (that's what happens when you give out an all you can eat program). i think the right way to normalize the noise is look at same store sales attendance + ticket prices growth
on that basis, AMC did +2% during 3q18. CNK did +6%. box office was +6%
so in other words, i don't believe adam aron when he proclaims what a success a-list would be and how it would be accretive to the P&L. had they not done a-list, they would've earned another 400bp of growth. and remember - 3q is a historically slow quarter. in 4q18 when the film slate picks up seasonally - by that point AMC would've had a lot more a-list subs and visitations / sub should increase relative to 3q.
quarterly box office view:
4q18 would most likely be down y/y because of the absence of star wars. thor from last year is also a tough comp too
1q19 would also be down y/y given the very tough comp against black panther and jumanji. besides captain marvel, 1q19 doesn't really have much. i don't think how to train your dragon or the lego movie would be enough
the backhalf of 2q19 and 2h19 is where the film slate starts to look really good. but here's the thing - from a timing perspective as you progress through 2019, sentiment around OTT, DIS/FOX would only get increasingly worse for the exhibitors. if we're right on 2019 box office being peak for forever, positive numbers revisions may not matter for the stock
yes we have been recently short AMC, but as majic correctly said - my interpretation of the material position disclosure was whether we own >5% of the company
as for borrow rates - it's general collateral for us and i believe for many other funds out there. i mistakenly chose tight
|Subject||Re: some more thoughts|
|Entry||11/22/2018 12:49 AM|
We are long AMC so I feel somewhat compelled to address and counter the points of this short thesis here:
Short thesis point: a) “US box office about to peak in 2019, forever.”
Rebuttal: In a way, the US box office has already peaked long ago in 2002, in terms of attendance, with 1.576B tickets sold in 2002, and now down to 1.289B in 2018, a -1.3% CAGR rate of decline over those 16 years. But with avg. annual ticket price up from $5.80 in 2002 to $9.14 in 2018, +2.9% CAGR (U.S. CPI +2.1% CAGR during same period), U.S. box office receipts on track in 2018 for 3rd record year in the past 4 years. So this bear case calling for 2019 as the all-time peak seems to deny the likely prospect of a continuation of that undemanding long-term trend given the usual smattering of unexpectedly attractive content, improved experience (reserved recliner seats, better food and beverage options), and pricing power given the still very low cost of the movie theater experience versus other out-of-home entertainment options like baseball games, rock concerts, theme parks, etc.
A loose but instructive analogy I think: we invested in what was then known as Phillip Morris (MO) in 1999, initially at a pre-split, pre-spinoff price of $40 in the summer of ‘99, averaging down at $19 to a $28 avg. cost by the winter (near the 1999 low MO was 5x FCF, with a 10% dividend yield, AMC at $14 is $1.44B mkt. cap., 4.3x our $335M est. of FCF, with 5.7% dividend yield). U.S. cigarette consumption had long before peaked at 640B cigarettes in 1981, and by 1999 it was 435B, a -2.1% CAGR rate of decline over 18 years, a bit worse than the -1.3% CAGR of theater attendance over the past 16 years. But price increases were running about a 4.7% CAGR over that time period, meaning sales kept growing. By the time we sold the last of our MO shares in Q4 2007, U.S. consumption had dropped to 367B, a continuation of that prior -2.1% CAGR rate of decline over the 8 years that we held that stock, but price increases were even higher at a 5.6% CAGR. So it was, in a way, a dying industry when we bought into it in 1999, and a dying industry when we sold out in 2007, but we realized well north of a 20% CAGR on that investment over an 8 year hold because we bought the stock at a very low valuation and the business had pricing power (obviously not an apples-to-apples comparison with AMC, as cigarettes are addictive and seeing movies in theaters may be habitual but not an addiction for most, also MO had 100% ownership of Kraft Foods, Miller Brewing, and PM International back then for added protection).
Another issue with trying to call a peak in the U.S. box office is that those revenues are only about 62% of AMC’s total sales, with about 31% coming from super high margin food and beverage (85% gross margin business vs. 50% gross margin on film exhibition), and the remaining 7% of sales coming from fast-growing online ticket fees for reserved seating and loyalty programs. Those non-exhibition revenues are growing faster due to increased options in F&B (alcohol increasingly on the menu) and the popularity of reserving a seat online, a service now available at about 45% of AMC’s domestic chain. “Dinner and a movie” has increasingly become “dinner at the movies” and it remains a very cheap date-night option. I think F&B is heading to 40% of sales in 10 years, with online ticket fees and others going to 10%, improving the overall EBITDA margin maybe more so than rising film rents may hurt it. Dave & Buster’s (PLAY) gets 42% of total sales from F&B, and despite the extensive availability of ever better video games at home, big screen TVs on which to watch sports, and hamburgers and/or pizza in abundance at home via delivery, Dave & Buster’s continues to grow. If the theory is that better content at home would keep people from going out for it, Dave & Buster’s should be a ghost town, and yet after 35 years in business, it’s still generating very high ROI on new builds.
So as long as creative people make new and engaging content, and people like to get out of the house from time to time, and the theaters accommodate us with an improving experience, they too should retain adequate attendance and pricing power. And maybe attendance might even start growing again? The reserved recliner seating at the AMC in NYC’s UWS has my wife and I going to the movies twice as much as we used to (about 6 times a year versus 3 times) and we only go to that theater now, despite it being on the other side of town from where we live. It seems others find the improvement equally enticing given the high ROI AMC continues to get on the theater conversions they’ve done both here and abroad and on which they’ve been spending so much cap-ex over the past few years. Returns will diminish as competition catches up, but if the installed based of the entire industry is experiencing a once in a generation upgrade, that’s probably good for the industry as a whole, and AMC in particular as the leader in that transformation both here and in Europe.
Short thesis point: b) “#1 supplier (DIS) merging with #4 supplier (FOX), increasing DIS market share from 1/4 to 1/3, which increased film rent expense at AMC”
Rebuttal: The theater industry is also consolidating, globally, as AMC + Odeon/UCI and Cineworld+ Regal shows, meaning the balance of power in negotiating rents is not shifting entirely to one side with DIS+FOX. Also, increasing food & beverage and other revenues provide a margin boost in case film rents do drift higher.
Short thesis point: c) “… studios launching direct-to-consumer “over the top” movie apps in at 2019YE, which should lower amount of films to be monetized in theatrical window and increases risk of shortening window”
Rebuttal: “Direct-to-consumer” used to be called “direct-to-video” and when the latter proliferated in the 1980s and 90s it did not seem to unduly harm the theatrical release window in terms of volume and length, so I don’t think this iteration of that channel should be much different in effect.
Short thesis point: d) “AMC Stubs A-List, subscription program akin to MoviePass, is cannibalistic to existing sales and burdens P&L…”
Rebuttal: It’s not entirely cannibalistic as it seems to be drawing in an above normal proportion of younger demo (millennials) who like the subscription option pricing but who often bring friends who aren’t A-list members and while they seem to buy less F&B per capita the overall effect on F&B is to increase it in any given month because of the increased attendance. So this investment in pricing should pay off in attracting millennials and also in muted volatility in that if up to 20% of sales are subscription-based at some point, wouldn’t that be worth a higher multiple? But yes, it does mute the upside during really good months, while cushioning downside in bad months. Still, I like that AMC is willing to experiment with dynamic pricing like surge pricing and a subscription pricing option as the industry hasn’t used the pricing lever as effectively as it could have in its history. For example, charging more on peak demand nights and less on Monday and Tuesday nights, or charging more for better seats, less for the four corners. Concerts and sports stadiums do it, airlines do it, why not movie theaters?
Short thesis point: e) “net leverage at 6x with no deleverage plans…”
Rebuttal: as of 9/30/18 total debt (including capital and financing leases) was $5.44B, minus $333M cash = $5.1B which is 5.7x TTM EBITDA of $892M, and 5.4x $939M EBITDA for 2019 based on consensus est. as per Bloomberg. The leverage is tenable, as even in the Great Recession, with consumer spending down for the first time since the 1930s and gas prices soaring, the business didn’t flinch, with U.S box office receipts -0.3% in 2008, and +10% in 2009. So it has proven itself to be fairly recession-proof in a pretty extreme example, and such stable cash flows can handle such leverage. I also don’t think the short thesis comparison to cable networks and broadcasters makes sense here because those are clearly more cyclical businesses which see ad sales drop in recessions and with the cable networks more secularly challenged from cord cutting.
Short thesis point: f) “negative FCF for the past few years despite ever record box office environments”
Rebuttal: that is not accurate. Even assuming the recent over-spend on cap-ex (elective) was to be perpetual (it's not), the company showed modestly positive FCF in 4 of the past 5 years. 2013: +$97M, 2014: +$27M, 2015: +$134M, 2016: +$10M, 2017: -$68M and that’s despite spending around 10% of sales on cap-ex, while normal maintenance cap-ex runs around 3% of sales. So if one defines FCF as cash from ops minus maintenance cap-ex, the business generates substantial FCF which they are electing to spend on high ROI projects (recliner seat conversions). I had invested once in Princess Cruise Lines (POC) right after the markets re-opened from 9/11, the company seemingly had negative FCF because of a multi-year over-spend on cap-ex to buy new ships, but normalized maintenance cap-ex was very light, and the ships ultimately proved to be good investments, and the stock nearly tripled for us in a very short time frame before getting bought out by Carnival. But just looking at a Bloomberg screen of cash flow one could have easily dismissed the business as a net cash burner from that cursory analysis. You really have to discern between maintenance cap-ex and elective cap-ex, as one goes on forever and one subsides at some point.
So we see AMC doing $950M in EBITDA in 2019 (a 17% EBITDA margin on $5.6B sales), $335M in FCF, and fairly valued at $32 per share (130% above last trade of $13.95) which would be EV/EBITDA of 9x and mkt. cap/ FCF of 10x. And if it can’t get there in 2019, it probably makes it in 2020. With a 5.7% dividend yield at current price, we’re ok to wait.
I also see the Silverlake Partners investment of $600M into AMC at $18.95 (35% higher than current price) as a pretty encouraging sign as Silverlake is a $40B firm with a very good track record.
|Subject||Re: Re: Re: some more thoughts|
|Entry||11/30/2018 04:57 PM|
Per Flaum's point, I don't think it is appreciated how disadvantaged Disney will be if it does not move to release its best and highest value content direct to consumer if it wants to build and sustain scale in global OTT, which is going to be a strategic imperative for the company as it walks away from 200-$300mm in pay 1 tv-licensing revenue, and continues to face declines in the linear bundle, eroding the value of Disney's networks business-which produces a lot of the operating profit of the company. Disney is going to be competing for time and money with Netflix, who is going to have more movie output that all the studios combined, Amazon is giving away its video subscription with Prime, AT&T who has to be all-in on DTC now given its mature wireless business and investment in TWX, and Apple, which has one of the largest install bases of direct relationships in the world through iPhone/iTunes platform and it likely to also give the content away by bundling with ios. I believe that the market is big enough for several--but a company is unlikely to be able to sustain pricing power and a large sub base if it does not deliver a lot of value------which for Disney will mean a lot of new premium content. It will have to drench the consumer with quality new programming. Disney has more to lose than any of the other companies (other than Netflix) because making and monetizing content is its core business--so if you believe that global OTT is fundamental to the future growth of Disney, then you have to believe that Disney will need to invest to maximize the scale of the service. Customers to Disney+ are not going to understand why they don't have access to all of Disney's newest and best content-and they aren't going to care about windows and they will not find a lot of value if they keep logging in to the service and seeing the same product.
If you look at Disney's studio economics, roughly 2/3 of the revenue is coming from home entertainment/licensing--logically this is driving huge incremental margin because there is low variable cost to monetize in home entertainment versus high variable cost in theatrical i.e. variable P&A. The money in movies is made in home entertainment. I would expect that just like music, digital distribution is going to slowly erode the economics of transactional content purchases---CDs-to individual iTunes song download--to subscription. The value will move to the subscription because it offers more content per dollar. Over time, this is going to put pressure on packaged media sales, rentals, and other forms of downstream monetization that rely on a transactional model. And even more so than music, most video content depreciates with time, which means that the exclusive theatrical window is going to dilute the value of new product for Disney because it prevents monetization when the content is freshest and the demand is highest. If the home entertainment economics in film move to subscription, then Disney has to respond if it wants to grow the value of its film franchise over time.
It seems unlikely that as the OTT market grows, packaged video declines, and the linear bundle frays, Disney will want to continue to wholesale movies to theaters, where it has no control over the consumer experience, collects no customer data, and then hold back the film for three months from public consumption while competitors are delivering new high value content with frequency. The opportunity cost of the variable P&A that Disney is spending on theatrical movies is going to only increase; if Disney spends $150mm to market a film--think about what that money could finance in terms of direct global distribution of content--that could be an entire televison series that could run for three seasons and drive acquisition and retention on Disney + or Hulu. And with a large global sub base-the variable P&A on the marginal film would decrease because Disney has already established the direct relationship and can merchandise the film at no incremental cost (this is one o the beauties of Netflix's direct to consumer film model). The unbelievably high cost of marketing movies to get people to show up on opening weekend will be a massively inefficient way for a studio to allocate capital if it could instead spend that money financing new content that it could monetize direct to consumer on a global basis.
Disney movies often have at least an 18 month lead time between development and release--in those 18 months, the theatrical experience remains basically static and does not improve. Conversely, the software that can deliver content direct to consumer in the home or on mobile can improve a lot-----the ability to personalize trailers, test cover art, merchandise content, improve buffering and encodes, one day maybe have AR/VR in the home. On a macro level, Internet speeds, reliability, and affordability also improve. Unless the theatrical experience can improve in meaningful ways, the time and money will continue to move to the distribution channels with improving experiences and value--and the content will follow.
|Subject||Re: Re: Re: Re: some more thoughts|
|Entry||12/03/2018 01:20 AM|
I think the comparison to home or mobile phone entertainment is somewhat misplaced here. Going to see a movie in a movie theater is an out-of-home entertainment experience. Yes, young people in particular like to watch movies on smaller mobile devices, and they also increasingly love downloading music or streaming it for free, and yet they are also going to live music events more than ever before. why? if I can stream a Lady Gaga song for nothing, and watch her music videos for free as well, why would I ever pay for expensive concert tickets and travel to see her do it live? why sit in the stands at a baseball game when I can stream it live on my phone? Sometimes a differentiated experience (out of home, communal?) seems to trump the cheapest or most convenient means of consuming entertainment content. So i continue to think that as long as people like to get out of the house/apt. sometimes, the movie theater business will endure. And I don't expect FCF to flatline at $335M, I expect it to grow faster than sales and EBITDA as deleveraging occurs and the overall EBITDA margin improves modestly (Odeon/UCI bought in 2016 with a 12% EBITDA margin, likely going to 17% tp 18% over next five years as delapidated properties underinvested-in during 12 years of private equity ownership, will get fixed-up now).
Also the theatrical release window has already shrunk significantly from 2000 (168 days) to 2017 (102 days), at first to accomodate boom in DVD penetration, and now presumably pressured by these other channels. And yet the U.S. box office still hitting all time records in 3 of the past 4 years, with YTD +10.1% and attendance up as well. So as long as it's gradual, the business should be able to continue to outgrow it.
lastly remember Disney was the most protective of the theatrical release window of all the major studios. maybe because more families goes to their films, more revenue per household that way. not sure. but they sat out the PVOD negotiations and buying Fox (a proponent of PVOD) seems like a good thing for preservation of the theatrical release window, or at least not a jarring reduction.
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|Entry||12/05/2018 10:06 PM|
I agree with you that concerts are way more differentiated experiences vs. streaming music than movies in theater vs. watching at home or on mobile, and the price differential reflects that. But I disagree that watching a movie in theater is "exactly the same experience" as watching on a phone or at home. Imagine when you were a kid if you saw Star Wars for the first time on your phone or home TV versus the much more immersive sights and sounds in theater. I can't imagine that. Imagine today, watching Interstellar in theater vs. on mobile device. There is a noticable difference with most movies, I think most people would agree.
Also one of the studio heads, I can't recall who it was offhand, but one of them speaking at a media conference recently said they were thinking of bringing episodic content to the theaters, so they can increase monetization. Imagine if Game of Thrones came out episode by episode in theaters first, maybe released weekly on a Sunday night or Monday night, before making it available online. Seems like an interesting way to wring more revenue out of this increasingly expensive content. If it happens. Anyway I just thought that was an unusual point for the studio head to make, given the consensus view that all content is racing to get online asap. Maybe not.
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|Entry||12/06/2018 07:58 AM|
I want to reiterate that I don't think movie theaters are going away. But I believe that the business model for movie studios is becoming less attractive, which increases the probability that the theatrical distribution model has to evolve-which could pose a challenge to the theaters' position as the exclusive distributor of new theatrical movie product. I don't know how you can analyze the economics of the movie theaters without looking closely at the economics of the suppliers and how technology is changing the incentives and distribution models.
Netflix's feature film business is effectively changing the economics of new movies from an appointment viewing model (i.e. show up on opening weekend) to an on-demand subscription model. Just like television, this shift is likely to establish an economic model that will allow Netflix to produce a broader range of movies, at increasingly higher budgets, expanding the addressable market for total movie watching on the service. The internet will allow this on a global basis. Subscription- supported television, beginning with HBO, established a model that improved quality and variety, as well as provided better economics for the programmer-i.e. HBO's revenue and profit steadier and more predictable than an ad-supported model-HBO's economics was the envy of the television industry. Over time, I am not sure why it would be different with movies--i.e. a subscription model is going to be a better way to monetize movies and meet consumer demand for value and convenience.
The question to me then is not whether movie theaters are viable and will exist and whether people will keep going, the question is what business model is going to allow movie companies to best monetize their IP and assets--and just like television, it is hard to see why this won't move to an on-demand subscription model over time. That model is going to eventually come into direct conflict with the exclusive theatrical window. That does not mean that movie theaters cannot thrive if they provide a wonderful out-of-home experience--incredibly immersive and thrilling experiences (like a concert)--but it does mean that the advantage that the movie theaters have historically enjoyed through the exclusivity of the theatrical window is going to probably going to deteriorate-they will have to earn the viewing through innovation, not exclusive distribution. The experience in the movie theater will have to improve way beyond where it is now to sustain improving economics over time (probably would happen if the movie companies could vertically integrate and buy the theaters--If Disney could manage the theatrical presentation of its product, it would be Willy Wonka=esque).
The major media companies waited way too long to pivot to internet-delivered on-demand television, in part because they legacy businesses were so entrenched and profitable. Now you are seeing massive shifts. The movie studios face some of the same issues (i.e. profit streams from libraries/packaged media are still good)--but the imperative to disrupt the current business model in order to position themselves better for the future is there and eventually they will need to react.