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Analyst gets bearish on AMC, downgrades stock cuts price to $6

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Macquarie Group Senior Analyst Chad Beynon joins Yahoo Finance to discuss why Macquarie Group decided to downgrade AMC Entertainment and how this latest development will affect AMC shares moving forward.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right. Underperform rating, $6 price target. That is what Macquarie Analyst Chad Beynon is thinking about shares of AMC right now in a recent note looking at the overall movie industry. Let's bring in Chad right now to talk more about this call. So Chad, let's just start with the vision that you guys have for AMC right now, and the fundamental kind of backdrop that you are analyzing AMC against, and how you're getting to $6 a share.

CHAD BEYNON: And thank you for mentioning the fundamental case here. So fundamentally, we had been calling for the box office in the United States to recover back to pre-pandemic levels really at the beginning of 2023. And we thought that 2022 would only be down mid-to-high single digits.

We've recently become a little bit more negative in terms of the pace of the recovery. So for this year, we're expecting the third quarter to be down 50%, fourth quarter down 35%, next year down around 15%. And then in 2023 versus pre-pandemic, we still expect for box office admissions to be down 8%.

And what the companies are doing to combat that negative admission trend is you're actually seeing really good trends in terms of pricing on ticket price and on concession sales. But for companies like AMC, we think they're going to get hit with the same inflationary pressures that others are seeing in the industry, and we just don't think there's a fundamental picture. We have them losing money in 2022. And then from our valuation standpoint, we're looking at 2023 free cash [AUDIO OUT] to arrive to our $6 target.

MYLES UDLAND: And Chad, in the last segment, we were just looking at a couple of major releases from Paramount getting pushed back another six months or more, depending on the exact film. I mean, is there still, perhaps, in thinking about the movie business-- you look at what's happening with the way HBO Max is treating some films, Disney Plus is treating some film, Paramount Plus might be treating films differently, is there still not really, let's call it a floor on what the box office baseline looks like on the other side of this? Because we are benchmarking to incredibly strong years for the industry, '17, '18, '19. And I do wonder if we're still not rationalizing what a normal-- quote unquote, "normal" box office looks like four or five years out?

CHAD BEYNON: That's exactly our thinking. Look, I think most studios do believe that they'll get back closer to this 45-day window at the box office instead of the day-and-date. Movies that have been released at the box office and simultaneously at the home have not done very well during the past couple weeks. Movies that have a 45-day window have done a little bit better, but still not back to what we were seeing before.

And then we look at trends that we're seeing at malls, theme parks, casinos, travel, so many sectors are back to pre-pandemic levels and the fact that admission revenues in the United States are still 50% of what they were. Now, I understand kids aren't vaccinated, so a lot of those G and PG movies aren't seeing much attendance. But still, for a good movie with PG-13 or R-rated, we're just not seeing the demand that we were seeing before.

BRIAN SOZZI: Chad, hang with me on this one. So I was a one-time stock analyst, covered retailers, many retailers for many years. I made some aggressive calls, but I never got a response by the-- like the similar responses that I'm getting when I tweeted out your note from AMC.

There is a very passionate group of people here, I would say retail investors, following AMC. As an analyst, what is it like right now to cover this company? Are you getting emails from, really, AMC believers? Do you get notes written to your house? Like how difficult is to do what you're doing here?

CHAD BEYNON: Thank you for that. Yeah, it has been a pretty difficult time. I think the AMC story is really momentum and technically driven. And a lot of the leaders of this following have highlighted that this is a really good time from a technical standpoint and a lot of people are calling for a breakout.

And some believe that the stock can get to $100. Some believe it can get to $100,000. It has outperformed other meme stocks. And it sounds like there has been some consolidation. However, we do think after Labor Day when some of these investors are back at work and maybe they're looking at other things, maybe they're gambling on sports which will be on this weekend and next weekend, maybe the bloom comes off the rose a little bit.

But yes, certainly there has been a lot of negative feedback, a lot of people just kind of go back and say the fundamentals don't matter. But we think they still do. And we think at some point the meme stock rally or the technical factors that everyone loves about AMC might become more attractive on other names. So when that happens, that's when we think a lot of the AMC investors could move into another name that they find more attractive, and then the fundamentals will matter.

MYLES UDLAND: And then, Chad, just finally, just to close the loop on this note, I mean, you guys are out with an outperform on IMAX and on Cinemark. So there are names in the movie business that you like. What are those two chains doing differently that gives them a little more visibility to some stronger performance here as the industry recovers, but perhaps, as we've been discussing, at a different pace than maybe some had hoped?

CHAD BEYNON: Yeah. So we really like IMAX. IMAX is a global company. About a third of their business comes in China, a third the rest of the world, and a third domestically. The 45-day window doesn't hurt them as much, because movies in an IMAX screen are generally there for one, maybe two weeks max.

Secondly, they get paid on the projectors that they place into AMC theaters, and Regal theaters, and Cinemark theaters. And they have a huge backlog that should be monetized over the next 24 months. So that's money that's just kind of in inventory right now that they will receive. They have a clean balance sheet as well. And the valuation is cheaper than what we've seen over the last couple of years.

For Cinemark, more of a traditional exhibitor similar to AMC or Regal, they historically have just generated significantly higher margins, so margins of 20% to 25% versus AMC, which is 10% to 15%, rent less than their screens as a percentage of total revenues. We think they're just in better markets. They have good growth. And they also have a great balance sheet.

So I'd say it's balance sheet, operations, and really just kind of a catalyst going forward. Cinemark also was the leader in terms of dividend paying. They had a really good payout ratio. I think they can get back to that, and that'll start in '22.

MYLES UDLAND: All right. We'll leave it there. Always appreciate the time. Chad Beynon with Macquarie. Chad, I know we'll talk to you soon.

CHAD BEYNON: Thanks, guys.