AMC ENTERTAINMENT HOLDINGS AMC
February 13, 2018 - 2:44pm EST by
mimval
2018 2019
Price: 13.75 EPS 0 0
Shares Out. (in M): 129,012 P/E 0 0
Market Cap (in $M): 1,774 P/FCF 0 0
Net Debt (in $M): 4,700 EBIT 0 0
TEV ($): 6,474 TEV/EBIT 0 0

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  • FCF yield
  • Dividend yield
 

Description

Bottom line:
From AMC’s current price of $14, we see upside potential of 125% to our $31.44 estimate of fair value, not including the annual dividend yield of 5.7% at $14. Our estimated minimum fair value of $31.44 is based on an EV/EBITDA multiple of 9.5x estimated 2018 EBITDA of $900M (17% EBITDA margin on $5.3B sales), which results in an EV of $8.55B, minus $4.7B net debt, plus $206M in National CineMedia (NCMI, $6.90) shares and other investments equals $4.056B equity value, divided by 129.012M shares. This also equates to a market cap / FCF multiple of 11.6x estimated $350M in free cash flow for 2018.
 
 
Background:
AMC was written up by Trive25 on 6/2/17 and JSTC on 6/9/17 (JSTC posted an exit recommendation on 12/19/17). Both write-ups and discussions that followed are worth a read. 
 
Our initial position in AMC shares came to us on 12/22/16 as partial consideration (in addition to mostly cash) for AMC’s acquisition of our Carmike Cinemas (CKEC) shares, realizing an excellent rate of return on a position that we had held for roughly nine years. Eventually adopting a rare activist stance (see our 5/16/16 CKEC write-up here on VIC), we argued that the original deal for AMC to buy CKEC at $30 per share in cash was too low, and we were partially successful in getting the terms improved to $33.06 in cash or a stock/cash combo that amounted to $34.35 in value per CKEC share on the deal closing date of 12/22/16. AMC was $35.10 and about one-third of our CKEC position converted to AMC stock. Alas, given AMC’s subsequent stock price performance in 2017, we would have been better off accepting the original all-cash offer. That said, AMC’s lower than expected earnings and share price in 2017 gave us the opportunity to build up the position in size at very attractive prices such that the longer term payoff should prove much more impactful to us than this decline. As shareholders of Carmike, we endured similarly violent stock price swings, as investors (and analysts) inexplicably continued to reprice the shares based on the most recent quarter or two, or even year, and extrapolate that performance into the future.  Last year’s 2.7% box office drop, coupled with Wanda’s (the controlling shareholder) leverage concerns, the emergence of MoviePass and the fear of premium video on demand, resulted in AMC declining from a high of $35 in December 2016 to a low of $11 in November 2017. Finally, contrary to the belief of many, we feel that the box office is recession-proof. People go to movies, regardless of the economy, proven most recently by the box office hitting a (then) record during 2008’s Great Recession.
 
AMC’s acquisition of Carmike, the 4th largest theater chain in the U.S., made AMC the #1 player in the U.S. AMC’s nearly simultaneous acquisition of London-based Odeon-UCI made AMC the #1 operator in Europe. All told, they are the largest movie exhibition company in the world with more than 1,000 theaters and 11,000 screens.
 
 
Why the opportunity?
AMC’s stock dropped sharply in 2017 on concerns that we believe will prove transitory. It started falling in the Spring on fear that its controlling shareholder, the Chinese conglomerate Wanda Group, might have to sell its 58% stake in AMC due to the deleveraging being forced upon many Chinese oligarchs by the state. That has not happened yet, but the sale of a controlling stake would not likely occur at a fire sale price if it were to happen, and could, in fact, yield a satisfying price, and force the markets to more accurately assess fair value.
 
Another concern that weighed on the stock price in 2017 was the weakness in U.S. box office results industry-wide, which declined 2.7% for the calendar year 2017, after two consecutive record years in 2015 and 2016. Meanwhile the UK had another record year at the box office in 2017, +3.6% (and they have Netflix over there, too, since 2012), and AMC is the #1 player in the European markets.
 
2017's headlines remind us most of what happened in 2011. It was a very poor Q1 2011 at the box office (-20%), followed by a weak summer box office. A supposedly very scary trend had emerged with many calling for the pending doom of the theaters, a fear which helped push down our CKEC stock to less than $5 per share in late 2011 (from a high of $19 in 2010), Regal (RGC) dropped from $15 to under $10 during same period (AMC not public yet back then). From The New York Times on 9.14.11. Adding to our temporary misery at the time, in August 2011, Murray Stahl of Horizon Kinetics was interviewed by Barron's and his one short recommendation in that interview, of all the companies he could have discussed, was Carmike. He said that margins were razor thin and that profitability would erode within the next two years. Meanwhile, five years later, 2016 box office hit all-time high for 4th time in 5 years and Carmike was bought out at $34.35.
 
Theater attendance has indeed trended down over the last 15 years, dropping about 1.3% per year on average since then, but with ticket pricing up 2.9% per year on average over the same time frame, the box office revenue grew at a 1.6% CAGR over that period and the US hit a new all-time high as recently as 2016, before dropping 2.7% in 2017. We believe that as long aspeople like to leave home occasionally for entertainment purposes, the movies will remain a popular choice.
 
And while most of the industry headlines highlight the dip in movie attendance, and the sell side seems to react violently to weekly box office trends, it’s rare to see much written about the roughly $5.6B in annual concessions (food & beverage) sales at the theaters, which is a 85% to 88% gross margin business, versus 45% gross margins on ticket sales. Concessions are growing as a percentage of total revenues, and EBITDA margins thus generally creeping higher. Concessions are growing not just from price increases, but a broader selection, including real food, wine and beer in an increasing number of locations. This is a big deal. If concessions continue to grow as percentage of total sales, in 5 years they could be 40% of total sales (from 33% today) and this business goes from an 18% EBITDA margin to 22%+ easily.
 
Also, AMC (and even more so CKEC), historically over-indexed (out-performed) the industry on both attendance performance and concession sales per capita. In 2015, industry-wide attendance was +4.1%, but AMC was +5.2% and Carmike was +10%. And despite an overall attendance drop industry-wide of 2% over the 4-years ended 2015, AMC grew attendance by 1.6% during that time. For AMC the conversion to recliner seats produced immediate, significant increases in attendance, and it still does, albeit with a diminished magnitude in the US as much of the low hanging fruit there, in terms of the most productive locations to renovate, has been worked through. But not so in Europe, where AMC is just now beginning the process of implementing these renovations to the Odeon-UCI theaters they bought.  EBITDA from those UK/European theaters will likely double over the next 5 years as the run-down, dilapidated theaters in generally good locations are refurbished with the reserved, recliner seats and better food options.
 
To preempt any questions on the impact of MoviePass, our two cents on it is as follows: if MoviePass benefits the theaters (saya 17% EBITDA margin becomes 18% for example, and sales go up unusually) it will show up as such and the sustainability of that incremental profit should be heavily discounted by the market as highly likely to be a one-off, non-recurring benefit. The stock shouldn’t rise much on the benefit of MoviePass, and thus not fall much when it ceases, which we believe it eventually will. AMC likely made a mistake in not getting in front of this, and should probably have made a subscription option one of their newly established pricing department’s first initiatives over a year ago. But Odeon (which AMC now owns) has already been doing it for a while in the UK and Europe, and it works well. Cinemark is now doing it as well. AMC just needs to catch up and present a subscription option at a sustainable price point and watch MoviePass fade into oblivion. It’s strange that AMC didn’t take the initiative on this years ago as they’ve experimented with it years ago and they see it works in Europe. Now they have to fend off an interloper and deal with disillusioned customers, who will likely find their MoviePass memberships frozen when they run out of money.
 
Finally, the 2nd largest U.S. theater chain, Regal (RGC), in December 2017 agreed to sell itself to a smaller UK company for $23 per share, a 53% premium to its November 2017 low of about $15, and a 9x EBITDA multiple. AMC at that same 9x EBITDA valuation would be $26.35, but we’re using a target multiple of 9.5x because AMC is much further along in the cap-ex intensive process of converting theaters to the new, attendance-boosting recliner seats, and AMC gets 20% of sales from Europe, where attendance trends have been stronger than in the U.S. and growth potential and valuations for theater stocks over there are generally much higher. So much so that AMC is now planning an IPO in London for its UK, Europe, and Nordic region theaters to both deleverage and attempt to capture some of that valuation premium.
 
AMC sold non-core investments in part to fund a $100M share buy-back program, and the CEO has bought shares personally at $31.50 (31,747 on 2/13/17), $24.72 (10,000 on 6/2/17) and $15.79 (35,000 on 9/14/17) which while not a huge amount ($1.8M in total) to invest for a guy who made $12.4M in total compensation in 2016, it is still a decent investment and an encouraging sign of confidence to other AMC shareholders, and something that we would like to see more of from some of the CEOs and directors at our other portfolio-held companies. Legendary value investor Seth Klarman (Baupost Group) bought 3.6M shares of AMC in Q3 2017, for a 6.7% stake in those class A shares (Q4 activity not out yet), so for once we’re not completely alone in our contrarian stance on this one.
 
Given all of the above, coupled with a 20% FCF yield and a sustainable 6% dividend yield, we believe AMC is one of the most attractive opportunities in the market today.
 

 

 

We are long AMC and may buy or sell additional shares at any time. This is not a recommendation to buy or sell securities. Please conduct your own research and reach your own conclusion.

We do not hold a position with the issuer such as employment, directorship, or consultancy.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

We don’t require catalysts for investment, as we’re guided by valuation, but there are several of note for AMC:
  • Recliner seats, better food, being able to reserve a seat online or via one’s phone…these are major improvements to the movie going experience and they have notreached even half of the AMC locations in the US yet and they have barely scratched the surface in Europe yet with these renovations.
  • AMC’s loyalty program (“AMC Stubs”) has increased from 2.5M members to over 10M in less than 2 years.
  • Planned IPO in London for its UK, Europe, and Nordic region theaters.
  • Short interest is significant at 18 million shares (34.4% of the float) as of 1/31/18.
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    Description

    Bottom line:
    From AMC’s current price of $14, we see upside potential of 125% to our $31.44 estimate of fair value, not including the annual dividend yield of 5.7% at $14. Our estimated minimum fair value of $31.44 is based on an EV/EBITDA multiple of 9.5x estimated 2018 EBITDA of $900M (17% EBITDA margin on $5.3B sales), which results in an EV of $8.55B, minus $4.7B net debt, plus $206M in National CineMedia (NCMI, $6.90) shares and other investments equals $4.056B equity value, divided by 129.012M shares. This also equates to a market cap / FCF multiple of 11.6x estimated $350M in free cash flow for 2018.
     
     
    Background:
    AMC was written up by Trive25 on 6/2/17 and JSTC on 6/9/17 (JSTC posted an exit recommendation on 12/19/17). Both write-ups and discussions that followed are worth a read. 
     
    Our initial position in AMC shares came to us on 12/22/16 as partial consideration (in addition to mostly cash) for AMC’s acquisition of our Carmike Cinemas (CKEC) shares, realizing an excellent rate of return on a position that we had held for roughly nine years. Eventually adopting a rare activist stance (see our 5/16/16 CKEC write-up here on VIC), we argued that the original deal for AMC to buy CKEC at $30 per share in cash was too low, and we were partially successful in getting the terms improved to $33.06 in cash or a stock/cash combo that amounted to $34.35 in value per CKEC share on the deal closing date of 12/22/16. AMC was $35.10 and about one-third of our CKEC position converted to AMC stock. Alas, given AMC’s subsequent stock price performance in 2017, we would have been better off accepting the original all-cash offer. That said, AMC’s lower than expected earnings and share price in 2017 gave us the opportunity to build up the position in size at very attractive prices such that the longer term payoff should prove much more impactful to us than this decline. As shareholders of Carmike, we endured similarly violent stock price swings, as investors (and analysts) inexplicably continued to reprice the shares based on the most recent quarter or two, or even year, and extrapolate that performance into the future.  Last year’s 2.7% box office drop, coupled with Wanda’s (the controlling shareholder) leverage concerns, the emergence of MoviePass and the fear of premium video on demand, resulted in AMC declining from a high of $35 in December 2016 to a low of $11 in November 2017. Finally, contrary to the belief of many, we feel that the box office is recession-proof. People go to movies, regardless of the economy, proven most recently by the box office hitting a (then) record during 2008’s Great Recession.
     
    AMC’s acquisition of Carmike, the 4th largest theater chain in the U.S., made AMC the #1 player in the U.S. AMC’s nearly simultaneous acquisition of London-based Odeon-UCI made AMC the #1 operator in Europe. All told, they are the largest movie exhibition company in the world with more than 1,000 theaters and 11,000 screens.
     
     
    Why the opportunity?
    AMC’s stock dropped sharply in 2017 on concerns that we believe will prove transitory. It started falling in the Spring on fear that its controlling shareholder, the Chinese conglomerate Wanda Group, might have to sell its 58% stake in AMC due to the deleveraging being forced upon many Chinese oligarchs by the state. That has not happened yet, but the sale of a controlling stake would not likely occur at a fire sale price if it were to happen, and could, in fact, yield a satisfying price, and force the markets to more accurately assess fair value.
     
    Another concern that weighed on the stock price in 2017 was the weakness in U.S. box office results industry-wide, which declined 2.7% for the calendar year 2017, after two consecutive record years in 2015 and 2016. Meanwhile the UK had another record year at the box office in 2017, +3.6% (and they have Netflix over there, too, since 2012), and AMC is the #1 player in the European markets.
     
    2017's headlines remind us most of what happened in 2011. It was a very poor Q1 2011 at the box office (-20%), followed by a weak summer box office. A supposedly very scary trend had emerged with many calling for the pending doom of the theaters, a fear which helped push down our CKEC stock to less than $5 per share in late 2011 (from a high of $19 in 2010), Regal (RGC) dropped from $15 to under $10 during same period (AMC not public yet back then). From The New York Times on 9.14.11. Adding to our temporary misery at the time, in August 2011, Murray Stahl of Horizon Kinetics was interviewed by Barron's and his one short recommendation in that interview, of all the companies he could have discussed, was Carmike. He said that margins were razor thin and that profitability would erode within the next two years. Meanwhile, five years later, 2016 box office hit all-time high for 4th time in 5 years and Carmike was bought out at $34.35.
     
    Theater attendance has indeed trended down over the last 15 years, dropping about 1.3% per year on average since then, but with ticket pricing up 2.9% per year on average over the same time frame, the box office revenue grew at a 1.6% CAGR over that period and the US hit a new all-time high as recently as 2016, before dropping 2.7% in 2017. We believe that as long aspeople like to leave home occasionally for entertainment purposes, the movies will remain a popular choice.
     
    And while most of the industry headlines highlight the dip in movie attendance, and the sell side seems to react violently to weekly box office trends, it’s rare to see much written about the roughly $5.6B in annual concessions (food & beverage) sales at the theaters, which is a 85% to 88% gross margin business, versus 45% gross margins on ticket sales. Concessions are growing as a percentage of total revenues, and EBITDA margins thus generally creeping higher. Concessions are growing not just from price increases, but a broader selection, including real food, wine and beer in an increasing number of locations. This is a big deal. If concessions continue to grow as percentage of total sales, in 5 years they could be 40% of total sales (from 33% today) and this business goes from an 18% EBITDA margin to 22%+ easily.
     
    Also, AMC (and even more so CKEC), historically over-indexed (out-performed) the industry on both attendance performance and concession sales per capita. In 2015, industry-wide attendance was +4.1%, but AMC was +5.2% and Carmike was +10%. And despite an overall attendance drop industry-wide of 2% over the 4-years ended 2015, AMC grew attendance by 1.6% during that time. For AMC the conversion to recliner seats produced immediate, significant increases in attendance, and it still does, albeit with a diminished magnitude in the US as much of the low hanging fruit there, in terms of the most productive locations to renovate, has been worked through. But not so in Europe, where AMC is just now beginning the process of implementing these renovations to the Odeon-UCI theaters they bought.  EBITDA from those UK/European theaters will likely double over the next 5 years as the run-down, dilapidated theaters in generally good locations are refurbished with the reserved, recliner seats and better food options.
     
    To preempt any questions on the impact of MoviePass, our two cents on it is as follows: if MoviePass benefits the theaters (saya 17% EBITDA margin becomes 18% for example, and sales go up unusually) it will show up as such and the sustainability of that incremental profit should be heavily discounted by the market as highly likely to be a one-off, non-recurring benefit. The stock shouldn’t rise much on the benefit of MoviePass, and thus not fall much when it ceases, which we believe it eventually will. AMC likely made a mistake in not getting in front of this, and should probably have made a subscription option one of their newly established pricing department’s first initiatives over a year ago. But Odeon (which AMC now owns) has already been doing it for a while in the UK and Europe, and it works well. Cinemark is now doing it as well. AMC just needs to catch up and present a subscription option at a sustainable price point and watch MoviePass fade into oblivion. It’s strange that AMC didn’t take the initiative on this years ago as they’ve experimented with it years ago and they see it works in Europe. Now they have to fend off an interloper and deal with disillusioned customers, who will likely find their MoviePass memberships frozen when they run out of money.
     
    Finally, the 2nd largest U.S. theater chain, Regal (RGC), in December 2017 agreed to sell itself to a smaller UK company for $23 per share, a 53% premium to its November 2017 low of about $15, and a 9x EBITDA multiple. AMC at that same 9x EBITDA valuation would be $26.35, but we’re using a target multiple of 9.5x because AMC is much further along in the cap-ex intensive process of converting theaters to the new, attendance-boosting recliner seats, and AMC gets 20% of sales from Europe, where attendance trends have been stronger than in the U.S. and growth potential and valuations for theater stocks over there are generally much higher. So much so that AMC is now planning an IPO in London for its UK, Europe, and Nordic region theaters to both deleverage and attempt to capture some of that valuation premium.
     
    AMC sold non-core investments in part to fund a $100M share buy-back program, and the CEO has bought shares personally at $31.50 (31,747 on 2/13/17), $24.72 (10,000 on 6/2/17) and $15.79 (35,000 on 9/14/17) which while not a huge amount ($1.8M in total) to invest for a guy who made $12.4M in total compensation in 2016, it is still a decent investment and an encouraging sign of confidence to other AMC shareholders, and something that we would like to see more of from some of the CEOs and directors at our other portfolio-held companies. Legendary value investor Seth Klarman (Baupost Group) bought 3.6M shares of AMC in Q3 2017, for a 6.7% stake in those class A shares (Q4 activity not out yet), so for once we’re not completely alone in our contrarian stance on this one.
     
    Given all of the above, coupled with a 20% FCF yield and a sustainable 6% dividend yield, we believe AMC is one of the most attractive opportunities in the market today.
     

     

     

    We are long AMC and may buy or sell additional shares at any time. This is not a recommendation to buy or sell securities. Please conduct your own research and reach your own conclusion.

    We do not hold a position with the issuer such as employment, directorship, or consultancy.

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    We don’t require catalysts for investment, as we’re guided by valuation, but there are several of note for AMC:

    Messages


    SubjectRe: Re: MoviePass + margins + call spreads
    Entry02/13/2018 03:30 PM
    Membermajic06

    Can think of 2 reasons:

    1) It will help their sub #s and allow them to keep the ponzi sceme alive w/ press releases and secondaries into the pump

    but more importantly

    2) they would just cancel the memberships.  https://www.mercurynews.com/2018/02/12/moviepass-terminates-some-accounts-for-allegedly-violating-its-terms-of-service/


    SubjectDisney Concentration
    Entry02/13/2018 04:37 PM
    MemberWinBrun

    Thank you for the write-up. Do you have any data on what percentage of U.S. box office per year is coming from Disney and Disney branded films (Marvel-Lucas-Pixar)? If the industry is increasingly dependent on one supplier--and that supplier one day decides to change its distribution strategy (i.e. release direct to consumer) that could be an issue. The environment is not the same as 2011 because Disney is going to need to build a large streaming business to offset the declines in its cable networks business and the licensing revenue that it is forgoing by taking letting the Netflix output deal lapse. 

    I realize people don't believe Disney will do this. But Netflix is now in the business of spending $100mm on movies that it is monetizing directly through subscription-which is a better business than monetizing through box office. I feel like Disney could drive an unbelievable amount of subscribers on a global basis for a streaming service that was promoting the Black Panther-exclusive to Disney streaming-and if those subscribers knew that a major Marvel feature coming each quarter-they may retain. Disney is probably the only company with this type of brand power today. Consumers will also know the difference between the $150mm big budget tentpoles and the made for television product-so I am skeptical that segmenting the box office product versus the streaming product is going to be sustainable over time if Disney is serious about building a global direct to consumer business. 

    I don't know that this would necessarily be terrible because I agree that people are going to want to see movies in theaters if they want to get out of the house. But I feel like the concentration of Disney product as the driver of box office attendance is not being discussed.

     


    Subjectfree cash ?
    Entry02/14/2018 10:59 AM
    Memberhbomb5

    Good write-up. What's your confidence in AMC generating substantial free cash the next few years.  The past 2 years they generated zero free cash.   With ~$5b in debt, it will take a lot to move the leverage needle down.   Thx.  


    SubjectRe: free cash ?
    Entry02/14/2018 12:16 PM
    Memberthrive25

    They have generated plenty of discretionary FCF that has been used in the remodels / conversions that, as mimval explained, has led to better than industry attendance metrics and premium pricing. They likely won’t cut back on the growth capex given the significant opportunity in Europe and in Carmike that still generate quite attractive unlevered IRRs and great cash on cash returns. They will, however, likely be able to delever the balance sheet somewhat by floating the Europe assets in an IPO and possibly selling a small amount (hopefully not too much — given the attractiveness of the potential growth) of shares, assuming they get the nice double digit EBITDA multiple the assets deserve and expect. But I expect the leverage will mainly come down through growth, although management has definitely signaled they plan to use some of their >$300 MM of free cash to pay down some debt in addition to growth spend, buying back stock, supporting the dividend. The CFO has indicated they are aware the market is discounting the stock heavily due to the perception that they have too much debt. I personally think the balance sheet is fine, because really if you dig into the unit level numbers you will see that true maintence capex needs are very low (industry average is ~3% of sales I believe) and thus, contrary to most casual observer’s beliefs, this is NOT a capital intensive business (Regal has proven this by the way, in the last 15 years having paid multiples of their book equity out in special dividends). If AMC grows to $5.5 billion in 18/19 and margins improve to, say, 19% they will be generating over $600 MM in levered FCF and leverage will likely dip to a comfortable 4.5x level. 


    SubjectRe: Disney Concentration
    Entry02/14/2018 12:45 PM
    Memberthrive25

    Winbrun — I think you are correct that Disney concentration is a risk, but keep in mind that they also have such dominance in the box office that they enjoy the fruits of this carefully perfected approach toward efficiently creating and marketing their tent-pole and franchised event movies. As you know, the number of ancillary revenue streams and the long profitable downstream economics have been very good to Disney.

    Is this changing? On many levels I concede it is; but your claim that Netflix has proven that $100 MM movies are better monetized through a sub model, presumably by attributing their recent sub growth to releases like Bright and others, I think is a stretch. I think Netflix has a very interesting model, and there is no question that spending at this moment in time, is efficient due to their growing scale — but eventually NFLX will need to stay disciplined on a certain proportion of spend, measured as $’s per hour of entertainment content produced, to give home viewers volume AND perhaps weekly movie release or two (that won’t be in the same league as what Disney can produce and finance given the clearer path to recouping an investment) and acheive any leverage on the spend. Bottom line is the consumer can’t get a bunch of high volume, high quality content, tent-pole movies, no commercials for one or two 9.99 subscriptions.  If Hollywood collectively is going to be spending 10’s of billions on TV and movie content, it can’t all be monetized through the home and without some marginal pricing for premium content. Disney knows this and will probably look to create a similar service to Netflix, given the obvious success, but it would be a mistake to blow up an admittedly old but extremely successful model — especially if they can co-exist.


    SubjectRe: Re: Re: Disney Concentration
    Entry02/14/2018 01:28 PM
    Membermajic06

    I think any parent will tell you that Disney has a ridiculous amount of content that's worth $9.99 a month w/o killing it's theatrical exhibition business that generates billions a year in profits direct and indirect.  Plus they will put all those movies on the streaming service in the 1st pay window, exclusively.

    Disney will have no problem gettings 10s of millions of subs rather quickly.  The original content they put on the service will be gravy.  


    SubjectRe: Re: Disney Concentration
    Entry02/14/2018 01:37 PM
    MemberWinBrun

    Thank you for the thoughtful response. I did not mean to suggest that the sub model is better because of Bright or new movies that may have driven recent subscriber growth. I think the sub model may be better because the film is monetized through a subscription that will have pricing power, and deliver direct consumer relationships and data, rather than the traditional theatrical model which depends on a diminishing stream of library cash flows from licensing the film over and over at high incremental margin and deliver no consumer data (Disney is unique among studios because the return on capital from box office alone is great because every movie they are putting out is a smash). But if the library cash flows from theatrical for Disney are going to deplete because Disney is going to keep its product exclusive to its service (i.e. no more output deals at least in the U.S.)--then in some ways it is already conceding that subscription is going to play a bigger role in monetizing its tentpole films in the future if it does not publicly say that. The home entertainment market is incredibly lucrative for Disney because kids watch movies over and over--and Disney is by far the leader in high-quality animated content-which is probably close to the highest value content for home entertainment. it is pretty amazing that despite its dominance in family entertainment and the die-hard fans of its brands---Disney knows virtually nothing about its customers and has no direct relationships---which is particularly glaring because the relationship for Disney starts when kids are very young which puts Disney in a great position to develop and deepen this relationship over time if it commits to building a large and sutainable direct to consumer business. It seems to me that this is going to potentially nudge Disney to release more premium product in the home over time--and the highest value product is new-big-budget tentpoles. You are right about the M&L business-which should be included in the conversation of the total economics for Disney's film business as the theatrical films serve as giant event marketing for toys and branded consumer products (probably parks as well) and support good economics in theatrical. But are kids going to want to buy Disney toys any less if they see a great new Disney movie in the house?--and what if a Disney branded streaming service could also provide a direct consumer product marketplace to satisfy that demand right when it is created? Watch the brand new movie on the Disney website--then order the toys on your phone immediately based on product recommendations that Disney can serve based on the data it has collected on your viewing habits. I feel like the potential here is greatest with brand new high value product. I acknowledge that this would be a fairly radical departure for Disney--but we are in strange times-and the economics of the old models are not improving in the same way the economics of global subscription can improve as the internet becomes cheaper and faster, the investment in high value home entertainment continues to increase, and home entertainment technologies becomes more immersive.   

    I don't know that I agree with your statement that consumers are not going to be able to get high-volume-high quality tentpoles for one or two $9.99 subscriptions. The marketplace is global-the subscription prices are going to increase over time allowing more investment--and the services are likely to end up being bundled in some way-which may improve the churn and allow for more reinvestment.

    Also-with the Fox merger, Disney's market power in the U.S. theatrical market is going to substantially increase. What is going to stop Disney from going to theaters and demanding better splits if Disney controls so much of the market? Certainly Disney is not going to want put the theaters out of business if it does need theatrical distribution-but won't it seek to get every dime possible short of making the theaters uneconomical?  Disney is a fairly ruthless company when it comes to wielding the power of its brand to demand better terms from licensees-and the public market investors are going to demand high levels of profit over time. What leverage will the theaters have over the company that is providing the vast majority of its supply?

    Short to medium term--I don't think any of this is a risk for AMC. And I think the trade is likely to work. Longer-term, I think it is difficult to handicap how committed Disney will be to theatrical releases and windowing----and with the industry structure now so concentrated, that could create problems for theatrical distribution.

    By the way, there may be a solution to that problem--which is that theaters will start showing Netflix movies as the Netflix slate of big-budget tentpoles expands. theaters claim that the little screen at home is not a substitute for the big screen. yet they still demand restrictive exclusivity windows and will not agree to day and date. I actually believe that if the movies are original and great--and the theaters can continue to improve the experience-then people will go to the theater even if they can get the movie at home the same day. It could take some business away on the margin--but that business could also be made up in volume if there are several new large movie distributors that get scale in the market that can get the theaters to release the films theatrically (i.e. Netflix-Amazon-Apple). 

     

     

     

     

     

     

     


    SubjectRe: Re: Re: Disney Concentration
    Entry02/14/2018 01:50 PM
    Membermajic06

    Just because "theater bulls" think movie theaters aren't going away because people like to get out of house and see a movie on a big screen doesn't mean if every movie was released on day 1 in our homes - for free - we would still go.   This is why theaters will never play Netflix movies w/o a window.  Mainly cause the theater would be empty.

    You can believe the above and still be an exhibitor bull.  By the way, according to WSJ today, PVOD is dead.  This shows you how strong the exhibition model is.  If you go through old AMC thread people were certain this was coming.

    https://www.wsj.com/articles/not-coming-sooner-to-a-home-theater-near-you-new-movies-1518609600

    And yes, Disney will have incredible pricing power over the theaters.  Remains to be seen if they will even be able to buy Fox.  Maybe they will have to divest the studio?  Who knows.   But it is for sure a risk for the theaters, no question.   But they need each other and it's existed like that for some time now.


    SubjectRe: Re: Re: Disney Concentration
    Entry02/14/2018 02:16 PM
    MemberWinBrun

    1) they are not going to publicly say they are less committed to theatrical right before they buy a giant movie studio that releases a lot of films with people already on edge  2) they will do what makes sense for the business long-term, which will probably be driven by technology and consumer desire--not what executives are saying today.  


    SubjectRe: Re: Re: Re: Re: Disney Concentration
    Entry02/15/2018 10:50 AM
    MemberWinBrun

    that is elegant non-snark snarkniess. Touche.

    No-that is not a correct summary. First, I don't think Disney would say it because it would upset the employees at Fox---not the investors. It would create tumult within Fox if Disney took this position publicly-it would also cause chaos for exhibition stocks (which is probably not a primary concern for Disney but not something that they want to instigate). But likely--Disney is saying it because it is the truth--today. Disney has no intention of shrinking the theatrical window or walking away from theatrical-today.   

    My point-which I maybe did not do a good job communicating, was that it is a possibility that Disney's interests in the future could change regarding the theatrical window. Maybe they won't. But it seems to me that you have to be almost certain that they won't if you are long exhibition---not in the near-term. But I believe it is difficult to predict how things could change--and my intention was to show that it could make sense, based on where the technology is going, how consumer behavior and expectations are changing, and why the economics of subscription are going to improve, particularly relative to theatrical as it is structured today (if theaters can institute dynamic pricing and Disney could charge $25/ticket for opening night of Black Panther--different story).  I don't think a lot of people appreciate what a big deal it is for Disney to move away from ouput deals in the United States. They are walking away form hundreds of millions in pure profit and removing their brands and characters from the most distribtued home entertainment platforms-which reduces awareness and ubiquity-two essential attributes for popular content. It is very substantial strategic shift for Disney--and it will need to be reinforced with investment and scale in the svod market, in my view.

    Disney has tremendous leverage with exhibition. That leverage is going to increase with the Fox deal. Maybe people believe they will never back-away from theatrical or embrace day-and-date. But is the industry structure healthy when one company holds on the cards and that entity could decide to pursue a different model down the road?

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Disney Concentration
    Entry02/15/2018 01:50 PM
    Membermajic06

    He's not even saying they do PVOD.  He's saying one day you get all the Disney Movies, Day 1, for $9.99 or $14.99 a month subscription, with Disney no longer going the exhibitition route.  He basically thinks everyone will turn into Netflix and we won't have movie theaters anymore because that's what the consumer will demand and they won't have a choice.

     

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Disney Concentration
    Entry02/15/2018 02:26 PM
    MemberWinBrun

    1-I am not saying that. I think we will have movie theaters for a long time and people will keep going to the movies. The only thing I am saying is that it seems like a risk for exhibition stocks (for multiples-perception-and sentiment) to be so tied to one supplier when that supplier's market power is about to intensify and it is difficult to predict what that supplier may find to be in its best interest in the future-particularly in an industry where the technology changes and that supplier is making fairly radical shifts in its business structure and its core profit generator is facing secular challenges (linear cable networks). I do think Netflix has a better business model to monetize film than theatrical distribution--and I think Disney is going to try to build a business that looks more like it--as is everyone else. Disney's actions are proof of that. Disney is on an unprecedented run of box office success--maybe they have cracked a code that no studio has been able to crack. But I would guess that three successive commercials failures at the box office would change the entire conversation around the merits of theatrical and windowing.

    2-Katana--you could be right. But I think the main concern at Fox was mainly related to the "Disneyfication" of Fox---not the windowing. A big part of the Fox identity and studio culture is related to the types of movies its various divisions make and distribute---edgy content (Deadpool at 21CF) and prestige content (Searchlight)---if Disney came in and reversed the position on the theatrical window---maybe the read through would be have been that it is step-one in the total transformation of the busness--which would have outweighed any satisfaction from the affirmation of the PVOD position

     


    SubjectRe: Re: Re: Re: Re: Re: Re: Disney Concentration
    Entry02/15/2018 02:43 PM
    Membermajic06

    Weird, it kind of feels like you're still saying that.  But what do I know!


    SubjectRe: Re: Re: Re: Re: Re: Re: Re: Re: Re: Disney Concentration
    Entry02/15/2018 03:45 PM
    Membermajic06

    katana, I understand.  I'm just amused he thinks they might go from strongly not wanting to sell STAR WARS/200-300m budget movie A/ on day 17 or 30 in a home at a $30 one time rental fee to showing STAR WARS day 1 in the home as part of a $14.99 monthly service.  Disney has said they will product original content for their service and I'm sure it will be magical.  I'm also very confident they will continue putting out the dozen movies a year in the theaters since they make billions off of it.


    SubjectWanda Director departure
    Entry03/14/2018 11:15 AM
    Membermimval

    8-K out last night noting that Lin (Lincoln) Zhang has resigned from the Board.  He had been serving as Board Chairman and was the last remaining member of Dalian Wanda Group.  As noted in our write-up, Wanda owns 58% of AMC’s shares and concerns initially surfaced last year of the potential for Wanda to exit those shares due to the deleveraging being forced upon many Chinese oligarchs by the state.  Zang’s departure appears to validate that possibility and the shares were down 6% yesterday.  Wanda selling their shares would not change the intrinsic value of AMC, even if it’s the largest shareholder doing the selling.  AMC is in no way financed by Wanda.  It’s a U.S. company based in Kansas City, Kansas, with its own balance sheet and no Chinese banks among its creditors.  The sale of their controlling stake would not likely occur at a fire sale price (anything near where it currently trades) if it were to happen, and could, in fact, yield a very satisfying price, and force the markets to more accurately assess fair value.


    SubjectRe: Re: Wanda Director departure
    Entry03/14/2018 05:15 PM
    Membermajic06

    I think it's rather unlikely Wanda would sell it's stake rather than just forcing a sale of the whole company.   They would get more in a complete sale and it would make more sense for everyone.  Not sure why they'd leave board though if that was there intent.  Why?

    Regarding buyers, it would be financial unless an international chain was interested (another Asia chain?).  I'd note that RGC had no competing bids during go-shop so not sure there is a real appetite for these assets at that valuation right now (9x).  


    SubjectRe: Europe / Capex concerns
    Entry04/23/2018 02:04 PM
    Membermimval

    rii136, sorry for the delay in responding:  

    1)  We don’t see Europe as a structurally better market, but we see the higher valuation of theater stocks there as a more accurate reflection of the recession-resistant persistency of their FCF.  Granted, Cineworld’s valuation got crushed by the RGC buy-out and has yet to recover, but the last remaining pure play publically traded theater stock in Europe, Kinepolis (KIN BB EUR 56) is still trading 13.8x EBITDA (est. for 2018) which is admittedly at least partially due to a higher degree of owned theaters, and higher overall EBITDA margin from real estate activities (leasing out unneeded space to third parties).  And while the U.S. theater industry, led by AMC, began large scale conversion to recliner seat in 2010 and still has less than 40% of theaters converted to recliner seats so far, Europe is just getting started.

    2) Maintenance cap-ex is only 3% of sales, about $150M for AMC, so the overspend on cap-ex lately is elective / growth-related (recliner conversions).  Although one could argue it’s not really “elective” if it’s so strategically imperative (if you don’t do it, others will, and you lose share), it will not be recurring forever.  So as recliner conversion-related cap-ex begins to abate (not anytime soon) the industry leaders will have reaped the majority of the benefits, and the industry as a whole will benefit from rationalized capacity and a higher return on this more productive format, much like the entire airline industry has benefitted from similar structural changes.  Also, the classic date night cliché of “dinner and a movie” may become “dinner at the movie” as the theater industry begins to siphon off some casual and fast-casual restaurant industry sales.

    3) Cineplex (CGX CN CAD 31) is still trading at 10x EBITDA for 2018, as mentioned above, Kinepolis is 13.8x EBITDA.  AMC’s European assets should present a very attractive prospective growth profile given the very low EBITDA margin that Odeon-UCI was operating at when they bought it, something like 12%, and the likelihood that will be dramatically improved over the next 5 years, probably to 18%.   A 10x EBITDA or higher multiple shouldn’t be so hard to achieve.


    SubjectRe: Re: Europe / Capex concerns
    Entry04/23/2018 04:58 PM
    Memberbedrock346

    AMC is interesting, but the capx is not elective and never has been. when you build state of the art in a market, you strand all the legaccy theaters. Never ending arms race.


    SubjectRe: Re: Re: Europe / Capex concerns
    Entry04/23/2018 05:45 PM
    Membermajic06

    I share my concerns that the capex is not elective (this cycle) and also that it's not generating enough of a return to offset the declining legacy product given AMC legacy and consolidated EBITDA #'s 2015/2016/2017/2018est.  The Box Office over those 4 years has been stable enough yet the huge $ spent by AMC has led to a decline in EBITDA.   It just makes no sense.  However...

    Not sure I agree that it's a never ending arms race.  Refurbed/renovated theater's are legit nice now with fully reclining gigantic seats.  What would the next phase be outside of 4D in every theater?  I don't know the history of movie theaters too well but I think in the last 50 years you had regular seats on a level floor, then standium seating, and now fully reclining stadium seating.  Two upgrade cycles in 50 years doesn't seem like a thesis killer to me.  I'm not counting IMAX because they get a return on all of that & IMAX pays for it, etc.


    SubjectRe: Re: Re: Path dependency
    Entry05/04/2018 10:24 AM
    Memberpunchcardtrader

    Very interesting !!

    There's a well-managed movie theatre small cap called Kinepolis in Belgium trading at 30X earnings. It is the darling of many retail investors as mgmt has a good track record. They have been able to offset small organic visitor count declines by selling more high margin candy. Management told me many US theatres are badly managed w.r.t. getting the last dollar from the customer. For example,

    • they have built the food & beverage shop right in front of the ticket queue to attract more customers. The only way to get to the theatre is through that shop
    • the people at the ticket counter also suggest buying M&Ms while showing it in front of the customer just before they hand off the ticket
    • they have modified the candy bag from cone-shaped to rectangular shape so optically the bag fills slower

    Just probing anyones opinion on this stock as it has been reaching new highs while US media trends typically lead Europe's 


    SubjectQ2 Print
    Entry08/01/2018 10:47 AM
    Memberrtrdtx

    any thoughts on quarter and stock reaction? 


    SubjectDOJ review of movie business
    Entry08/03/2018 08:02 AM
    MemberJSTC

    Does anyone have a view on this?  Rather than acquiring one of the big-3 exhibitors, it seems revocation of these rules (if enacted) would be more likely to lead large studios to buy/build theaters in select large market DMAs.  In addition to giving them more leverage versus the big-3, it would also be a smaller and more targeted use of capital with less risk.  In other words, buying a circuit that spans the whole country brings with it high fixed cost overhead and significant cyclical risks.  However, owning a handful of premium theaters in large markets gives the studio (e.g., Disney) the leverage and market presence they desire, without exposing their P&L (and balance sheet) to much risk.

    https://variety.com/2018/politics/news/consent-decrees-department-of-justice-1202893374/


    SubjectRe: DOJ review of movie business
    Entry08/03/2018 09:43 AM
    Membermajic06

    They would still need nationwide distribution and not sure why that would give them leverage over those negotiations.  I also don't see them buying a chain.

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