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AMC’s business strategy remains flawed, hurting AMC stock

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AMC Entertainment (NYSE:CMA) continues its strategic expansion of theater locations in the United States. While this could give it more market share, it’s a terrible move for AMC’s shareholders and stock.

Source: Shutterstock/mundissima

On December 22, AMC announced that it had reached Lease contracts for the former Pacific Theaters and ArcLight Cinemas in Los Angeles and Chicago. Additionally, in 2021, it acquired four theater locations from the now gone theater chain. Theaters are expected to reopen under the AMC banner this spring.

AMC CEO Adam Aron was thrilled with the theater acquisitions: “Those[er]s have already been high-traffic, thriving locations, in two of AMC’s core markets, and we’re excited to bring the AMC experience to them a few months from now in 2022,” Aron said in the release. the company’s December press.

“These are great examples of how AMC remains on the attack, looking for opportunities to strengthen our business through the acquisition of these popular locations.”

The CEO went on to say that of the approximately 150 theaters in the Los Angeles area, two recent acquisitions in Southern California – AMC The Grove 14 and AMC American at Brand 18 – consistently rank in the top 10 for box office receipts. -office in the area.

According to the company’s website, there are 38 rooms in the Los Angeles area. The 2020 10-K indicates that California had 54 rooms end of 2020. Thus, the Los Angeles market represents nearly three quarters of its Californian activity. Based on 597 cinemas in the United States at the end of September, the Los Angeles market represented 6% of its total number of theaters.

So you can look at the numbers above and assume the company has plenty of room to expand in the LA market, or you can consider its 25% market share in LA to be good enough, given that AMC already controls the majority of theaters across the country.

Does he need more than 600 theaters in the United States?

What is the value of the Los Angeles market?

An article from Los Angeles Times says the city is “the largest box office market in the country”, but he gives no details. However, the March 2021 article stated that US box office revenue in 2019 was $11.3 billion.

According to CNBC data from Comscore, Los Angeles is the largest designated market area (DMA) in the United States, representing 8.9% of ticket sales, 150 basis points ahead of New York.

So Los Angeles’ box office share of 2019 was around $1 billion. [$11.3 billion x 8.9%]. Based on my rough estimate of 25% market share in the Los Angeles DMA, that’s $250 million in revenue for AMC stock every year.

In 2019, AMC’s admissions revenue was $3.3 billion, suggesting that Los Angeles accounted for around 7.6% of its overall box office. Using the same assumption, food and beverages were worth $130.7 million in additional revenue [$1.72 billion x 7.6%] in the Los Angeles market. This represents $380.7 million in total.

Based on a current price-to-sales ratio of 5.8x, my guess at the bottom of the napkin suggests Los Angeles is worth $2.2 billion in market capitalization.

However, this assumes that the P/S multiple is reasonable. In 2019, its P/S ratio was 0.2x. At that multiple, Los Angeles is worth $76.1 million, not $2.2 billion.

The essentials on AMC shares

Ultimately, AMC’s reliance on movies and theaters will be its downfall. The country does not need more theaters. According to page 12 of its 2019 10-K, there were 5,548 theaters in the United States and Canada. Roll back the standard 10% for Canada – Canada’s population is about 10% that of the United States – and you have 4,993 in America. AMC’s 597 theaters make up about 12% of the total.

You can add more rooms and screens to increase the 12%, but ultimately the attendance trend is down.

To earn its $11.7 billion market cap, AMC needs to bring a more diverse set of revenue streams to the table. But, unfortunately, the higher prices for tickets and food/drinks can’t do much.

As the business is built today, I don’t know how any investor can view its potential growth with anything other than skepticism.

Its commercial strategy remains imperfect.

As of the date of publication, Will Ashworth had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication guidelines.

Will Ashworth has been writing about investing full time since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and many others in the US and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

AMC’s business strategy remains flawed, hurting AMC stock

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