What a brutal six months it’s been for AMC Entertainment. The stock has dropped 39% and now trades at $3.25, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy AMC Entertainment, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Despite the more favorable entry price, we don't have much confidence in AMC Entertainment. Here are three reasons why we avoid AMC and a stock we'd rather own.
Why Is AMC Entertainment Not Exciting?
With a profile that was raised due to meme stock mania beginning in 2021, AMC Entertainment (NYSE:AMC) operates movie theaters primarily in the US and Europe.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. AMC Entertainment’s demand was weak over the last five years as its sales fell at a 4% annual rate. This was below our standards and signals it’s a lower quality business. 
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the last two years, AMC Entertainment’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10.5%, meaning it lit $10.47 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
AMC Entertainment burned through $560.1 million of cash over the last year, and its $8.46 billion of debt exceeds the $527.4 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the AMC Entertainment’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of AMC Entertainment until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
AMC Entertainment isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 2.5× forward EV-to-EBITDA (or $3.25 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. Let us point you toward Yum! Brands, an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of AMC Entertainment
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