The other day, Saudi Arabia had a great announcement: the country was going to lift its 35 year ban on movie theaters. And what a way to end it than with the rights to show the greatest Marvel film in recent memory, Black Panther (as you can tell, I’m biased.)
But with the announcement also came something else, the country was giving the first rights to build theaters in the newly opened country to one company, AMC Entertainment, owned by Wanda Group. I’ve always gone to AMC theaters but as a stock, it never really came to me until Uche recommended them during our conversations in our investment group. To the level that my grasp of the media/entertainment business is weak, Uche’s is strong so I always listen when he brings up a company in this space. However, I didn’t really buy it because I’m doing so much on the money front right now and my stock investments have kinda slowed down bigly.
In the mean time, I kept an eye on them. I will be the first to admit that I didn’t really like everything about the company. Revenues globally were trending down, but more so in the US with movie theater attendance dropping almost 20% in the third quarter of last year compared to the year before. Average ticket prices were still inching up due to the prevalence of IMAX movies, but outside the big box films, there wasn’t too much selections available. Also, people were freaking out about Video on Delivery guys like Netflix, HBO and so on completely killing the movie going experience. For a while, even I was worried about this too.
However, a few things have made me rethink this position. The first is that Video on Demand seems to be decimating cable TV much more than movie theaters, although the latter are suffering too. I realized that regular degular cable TV when it first came out must have been considered a huge threat to movie going, but here we are decades later, and movies are still there. Therefore, Netflix and HBO with their endlessly amazing shows are much more an attack on TV than on film. I mean, we still call Netflix shows television shows. The streaming age is being tagged the golden age of television. Films are going to be fine. The big screen is called the big screen for a reason. Not many of us are going to have TVs that big, and it’s really really fun watching films on that big screen so I think beyond a certain point, people are still going to go to the movies.
What needs some work is the number and quality of movies available that will take you there. 2017 wasn’t the most exciting year for films, there were good big box films but you still need a lot more variety and quality options at the medium and small box ends of the spectrum. I think that’s a contributor to last year’s dismal numbers, and if the studios fix that while keeping the big box energy that they’ve brought so far in 2018, even American and global box office numbers are going to do well. Which would be a boon for AMC after swallowing up Carmike, Odeon and Nordic across different countries. Black Panther has already started the trend by smashing every record there is for most Marvel films and becoming one of the highest grossing movies of all time. In February. All the box office has to do is keep that energy with the summer blockbusters and then give us some really great, creative and heart tugging films the rest of the year. If that happens, AMC will have an amazing year.
Add to that the plum market handed to them by Saudi Arabia: a well off population, very little competition (Netflix is in the country), pent up demand and more. AMC projects it will build at least 30 new theaters in the country over the next decade as it ramps up to the audience demands. Let’s assume that the theaters match the performance of existing ones in AMC’s portfolio, or even underperforms it slightly (it is still Saudi Arabia after all). They still have the potential to increase the movie’s revenues and profits by roughly 20% annually, depending on what their margins look like.
Which brings me to their bottom line. For a little over a year, AMC was spending high on capex, remodeling most of the Carmike smaller theaters it acquired and rebranding them. That’s largely done, so capex should come down by a good amount, improving AMC’s margin in the process. Most remodeled movie theaters have really good performance and generate above market returns for a while. At the same time, a lot of the old Carmike leases which AMC has been paying has transferred over to AMC now, which means better terms, better pricing power and thus lower expenses all of which translate to the bottom line. So I expect to see margin improvements across the board. To put a slight number on that, exhibition costs have come down by close to 16% to just over 50.6% of total revenue for AMC in the last year. That’s a really amazing number. If it goes back down to under 50%, AMC should see at least 10% extra net income from that alone.
All in all, it is fair to project that AMC shares will go from around $15-16 that it’s hovering around now to around $30 in maybe two years. My only pause here is the talks last year of the industry starting a premium video on demand service to compete with Netflix, Amazon and HBO. I hope they don’t do it, and with Disney’s purchase of Fox I think they won’t do it but you never know. I’m definitely going to ask Uche about this.
Either way, I plan to start buying, and with the investment club, we’ll probably also be looking into them. I think you should too but always keep in mind that I’m only telling you my views. This is not my full analysis and I’m not offering you investment advice. Do your own homework and your own investing.
I can put capital to work for you at roughly 20% return annually, if you’re interested reach out to me. Also, we have an investment club that we’re getting ready to kick off. I mentioned it earlier in the post. If you want to be part of that, email rumexxcapital at gmail.com with the subject line as “INVESTMENT CLUB”.