Buy AMC Shares If The Stock Dips

The last time I wrote about AMC Entertainment (AMC), I asked if the stock was a knife worth catching. Since then, the stock fell from $14.16 to as low as $11.66. But after the fourth quarter report, investors piled onto the stock. The company deserves the bullish buying thanks to stronger sequential results, but questions remain. Should the company pay a generous dividend when its balance sheet is burdened by debt? Will 2019 movie attendance add to revenue growth?

Tougher Year-Over-Year Comparison

AMC benefited from strong movie title releases in 2018. Venom, Incredibles 2, Avengers: Infinity War and Black Panther led to strong movie attendance in the period. That the domestic entry box office reached a new all-time record of ~$12 billion will make this year's comparable results harder to match. Still, AMC's 6.1% attendance increase last year drove revenues to a record $5.5 billion. AMC's food and beverage revenue growth of 8% is a notable achievement because it lifted EBITDA by 13% Y/Y to $929.2 million last year.

Growth Drivers in 2019

Theatre renovations will continue to drive revenue this year. In 2018, AMC enjoyed a return of above 25% with its recliner renovations. The response in Europe was even better, with returns of more than 50%.

AMC's mobile app and website benefited from higher online engagement. With online sales accounting for 45%, the company has room to derive even more sales from this channel. The operating cost model for online is likely better than offline and will add positively to 2019 EBITDA.

The AMC Stub A-List program continues to be of strategic importance, especially when Helios' (OTC:HMNY) MoviePass is not going away. The subscription helped AMC outpace sales in the industry domestically. The monthly prepaid subscription offering is incredibly successful because it launched just eight months ago. Stubs has 18.6 million member households. 45% of that clientele is using Stubs to track purchases at AMC and collecting the all-important loyalty points. AMC forecasts that it will send 1.5 billion e-mails and texts to Stub members.

AMC ended Q4 with 704,560 members on the A-List. Expect these members to add to AMC's profitability as moviegoers bring friends and family who pay full price, along with buying food and beverage at the theatres.

Strong Pricing Power

Thanks to the demand inelasticity of the subscription, AMC raised membership prices by 13%. Investors may expect membership continuing to grow despite the price increase. Once again, because subscription moviegoers visit the theatre more often than non-members, AMC has the opportunity to grow overall attendance and make more profits from concession sales. A-List members spend around 2.5 times more on food and beverage compared to before signing up.

When AMC stock rallied to more than $16 following its fourth quarter report, investors may have become overly excited. Stubs A-List was EBITDA neutral to slightly positive in January and February. For every 1 million subscribers, AMC gets between $15 - $25 million in incremental adjusted EBITDA (annualized). The $11.6 million adjusted EBITDA in the second half of 2018 also is at the lower end of management's $10 - $15 million target. Despite subscription growth exceeding expectations but adding less than thought in 2018, AMC now forecasts A-List will add to EBITDA this year, one year ahead of schedule.

Subscription Model Key to Buying AMC Stock

Investors who held Adobe Systems (ADBE) or Microsoft (MSFT) will recognize the contribution to profit growth when a company shifts from charging per unit to administering a subscription fee instead. Adobe's Acrobat subscription and Document Cloud, for example, added $800 million in revenue. Microsoft leveraged giving away Windows 10 by selling Office 365 subscriptions. Even though AMC will not enjoy the same profit margins as a software company, AMC would lead in this new model for the movie industry.

Risks

AMC's 4.3 times debt/equity might trouble investors, especially when the stock's dividend yields 5.1%. If movie attendance falls due to poor movie title releases in 2019 or if the economy weakens, AMC's cash flow will fall. That would renew investor worries over the company's debt. At a time when the Fed has a bias to raise rates, holding high levels of debt would ultimately hurt AMC stockholders.

Valuation and Your Takeaway

Six analysts cover AMC stock and have, on average, a $19.50 price target.

Source: Tipranks

After AMC's strong rally to above $16, near-term profit-taking pressure suggests investors may wait for a better entry point. If shares fall below $14, investors who missed last week's rally may start a position and wait for the next quarter's report.

Please [+]Follow me for coverage on deeply-discounted technology, under-covered stocks. Click on the "follow" button beside my avatar.

For a limited time, I am inviting readers to sign up for a risk-free, trial subscription to DIY (do-it-yourself) investing. This invitation will close after reaching capacity.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.