Shares of AMC Entertainment Holdings (NYSE: AMC ) popped on March 1, after the movie theater operator reported fourth quarter numbers that largely topped expectations and impressed investors. AMC stock traded more than 10% higher in response.
Meanwhile, despite all those positive fundamental developments, AMC Entertainment stock still trades at well under 0.5 times trailing sales and features a 5%-plus dividend yield.
In other words, when it comes to the AMC stock price, improving fundamentals are starting to converge on a discounted valuation. That convergence almost always leads to a rally. That's exactly what you will get with AMC stock in 2019. The numbers will get better. Investors will rush in. The valuation will expand.
Ultimately, AMC Entertainment stock will head higher. How much higher? Prices around $20 seem doable by the end of the year, implying 30%-plus upside over the next 12 months.
AMC's Fundamentals are Improving
AMC Entertainment's Q4 numbers were good. But, good numbers aren't the big story here. The big story is that these numbers corroborate the thesis that the theater operator's long-term fundamentals are rapidly and dramatically improving.
Remember when everyone thought movie theaters were going to die like malls? That hasn't happened. As it turns out, people like going to the movies. It's an enjoyable experience, and we live in an experience-driven economy where such pleasures are more valuable to the consumer than ever before. So long as going to the movies remains enjoyable, the movie theater business will remain healthy.
AMC is doing all it can to make sure that ticket buyers are happy sitting in leather reclining seats, eating from expanded bar and food menus, watching upgraded screens and listening enhanced audio systems. The result is that traffic has been on a consistent uptrend for the past several years.
Further, AMC is also pivoting to a subscription model so as to increase revenue visibility, reduce box office-related volatility, and boost food and beverage sales. It's a pivot that's working. Stubs A-List now has 700,000 subs and is adding more than 100,000 new ones every month.
It also helps that Hollywood is pumping out highly anticipated and widely watched content. This strong content production rate won't slow in 2019. If anything, it'll only get better, as Disney (NYSE: DIS ) is set to launch arguably its best movie line-up ever this year.
All in all, AMC's underlying fundamentals are rapidly and dramatically improving. No longer is this a company challenged by secular headwinds. Instead, it has carved out staying power for itself in the entertainment industry, implying that growth should be more stable going forward.
AMC Entertainment Stock Looks Undervalued
With the shares now down 28% from their 52-week high, AMC stock isn't priced for stable growth, and that's why the bull thesis looks compelling here.
Trading at below 0.5x trailing sales, AMC Entertainment stock sports an anemic multiple often reserved for zero-growth and/or dying companies. Meanwhile, the dividend yield is north of 5%. Again, that yield is often affiliated with a no-growing, at-death's-doorstep enterprise.
AMC is neither of those. The movie theater business remains healthy and relevant. AMC remains the leader in that business. The company also has some promising growth initiatives in Stubs A-List and theater upgrades which could further boost growth. This company projects as a solid low- to mid-single digit revenue and profit grower over the next several years, in-line with historical box office growth rates .
With its current stats, combined with the profit growth, AMC Entertainment stock will produce solid return for investors. How much return? Given my long-term EPS target for AMC of $2 a share, I think fundamentals support AMC stock at $20 by the end of the year. That implies upside in excess of 30% from current levels.
Reports of the death of AMC and the movie theater business have been grossly exaggerated, and that is becoming increasingly obvious as the chain's traffic numbers continue to head higher. Those numbers will keep heading higher in 2019, fueling AMC stock's rally toward $20.
As of this writing, Luke Lango was long AMC.
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