AMC Entertainment (NYSE:AMC) is scheduled to release its fourth-quarter (Dec. 31) earnings after the market closes on Tuesday, March 1. The results should showcase the company’s continuing turnaround in revenue and earnings improvement. As a result, AMC stock has a good chance of making a comeback from its recent declines.
In fact, the stock is well off its highs set in mid-Sept. 2021 at $51.69 (Sept. 13). This is because as of Friday, Feb 18, AMC closed at $17.90. This is not that much higher than its recent low on Jan. 27, at $14.52 per share.
So investors have been pushing the stock down, partly despite the Q3 improvement in revenue and earnings. This is because the market is likely looking past the upcoming fourth-quarter earnings.
AMC’s Outlook is Not that Bad
The market may actually be overreacting to current events. Events in Russia and in Ukraine are not going to affect the mood of people to go to the movies or their entertainment habits that much.
The good news is that if AMC can show that its margin outlook is improving in the upcoming earnings release, the market can relax a bit.
For example, as it now stands, analysts forecast that revenue in 2022 will rise 85.8% to $4.59 billion. This is up from the $2.47 billion revenue forecast for 2021.
On Feb. 1, 2022, AMC already pre-released some figures for the fourth quarter ending Dec. 31. It reported that revenue should be “approximately $1,171.6 million compared to $162.5 million for the three months ended December 31, 2020.”
Investors had been looking to see if Q4 2021 revenue exceeds $1.11 billion. This was based on the average forecast from analysts surveyed by Seeking Alpha.
In fact, Refinitiv’s survey of 7 analysts had a slightly lower forecast of $1.09 billion (as seen on the Yahoo! Finance Analysis tab page).
So we already know that AMC has beat these benchmarks for the upcoming fourth-quarter results from AMC Entertainment.
Moreover, the company has now moved into substantially positive adjusted EBITDA profits (earnings before interest, depreciation, and amortization). The Feb. 1 pre-release reported that the adj. EBITDA profits will be between $146.8 million and $151.8 million.
This is much better than last quarter when AMC Entertainment made a loss of $5.4 million in adj. EBITDA. It could also imply that the company is now producing positive free cash flow (FCF), although AMC has not yet reported this in the Feb. 1 pre-release.
What This Means for AMC Entertainment
If AMC can move into positive FCF, this value for the stock will shoot up significantly. For example, if the company can make a 10% FCF margin on $4.59 billion in sales in 2022, its FCF will hit $459 million.
We can use that to value AMC stock. For example, assuming the stock is rated with a 4% FCF yield, which is the same as a 25 times FCF multiple, it will be worth $11.475 billion. This is because if we multiply $459 million FCF by 25 times the result is a market capitalization of $11.475 billion.
This is 24.7% over today’s market cap of $9.01 billion. Moreover, if we use a 3% FCF yield (i.e., a 33.3 times P/FCF multiple) the target market cap rises to $15.3 billion. That is 66.3% higher.
So you can see that the value of AMC stock lies somewhere between 25% and 66% higher. To be conservative let’s call it one-third more or 33% higher. That puts the value of AMC stock at $23.5 per share (i.e., 1.333 x $17.63 price today).
What To Do
Analysts are not as sanguine on AMC stock as I am. For example, the average of 4 analysts surveyed by TipRanks is an average price target of $11.75, or 34% below today’s price.
Moreover, the average of 9 analysts surveyed by Seeking Alpha is $10.45, although they range widely and the high is $35.10. More importantly, this page shows that the average analyst target has dropped significantly in the past six months from $51.69 on Sept. 13 to $27.20 by the end of 2021. Since then the target prices have kept falling dramatically.
It’s almost as if the market believes that the company is going to go out of business, as it almost did during the Covid-19 slump. That is not likely to occur. In fact, AMC was able to refinance $950 million of its high-interest rate debt recently, helping to lower its ongoing costs. The new debt offering extended its maturities to 2029 and lowered the financing coupon cost from 10% and 15% down to 7.5%.
As a result, AMC stock is still worth at least one-third more at $24 per share, which it might be able to achieve sometime over the next year.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.