Since Chinese conglomerate Dalian Wanda acquired it for $2.6 billion in May of 2012, Movie theater operator AMC Entertainment (AMC) has boosted its screen count, aggressively updated the sound and digital-projection of its rooms, and improved food and amenity offerings. Accordingly, the movie chain’s stock has been the best performing component in the exhibitor sector in the time following Wanda’s involvement, nearly doubling the growth of it biggest rival Regal Entertainment (RGC), as well as outrunning critical darling IMAX (IMAX). Most recently, it made a splash when it announced a $1.2 takeover of Carmike Cinemas (CKEC), a deal which will make AMC the largest theater operator in the United States. But, as would-be moviegoers increasingly favor at-home and on-demand entertainment alternatives, concerns about the long-term health of the American theater industry abound. So, to which types of investors does the stock appeal? Moreover, will recent initiatives help it ensure long-term growth in an increasingly digital and mobile entertainment marketplace? In this article, we will attempt to answer some of these questions by evaluating AMC Entertainment’s business, strengths, weaknesses, opportunities, and threats.
Business
The world-spanning entertainment company’s lineage traces all the way back to a small Kansas City theater in the early 1920s. But, it was when AMC introduced the multiplex model in the 1960s that business really took off. Strong growth persisted for decades, as AMC grew its theater count and maximized profitability in tandem with a growingly lucrative American film industry. But, the operating environment has become more challenging since around 2003, when box office grosses surpassed admissions for the first time (calculated using the MPAA’s annual average price). The advent of the Internet, and subsequent introductions of alternative entertainment like Netflix (NFLX), has been hugely disruptive to the exhibitor sector, as well. And, for over a decade, AMC and its competitors have relied on higher ticket prices and margin-boosting concession offerings to sustain year-to-year growth. In recent years, though, a renewed focus on improving the customer experience, from the ticket window to the closing credits, has offered a glimmer of hope for investors. That is, if the company can create a differentiated, cost-effective, and profitable entertainment experience, why can’t it thrive in the future?
Strengths
U.S. Market Diversity: With 388 theaters operated as of September 30th, AMC screens films along urban thoroughfares and in suburban malls, from coast to coast. The circuit boasts number one share positions in New York (44% market share), Los Angeles (27%), and Chicago (43%). Still, many of its busier theaters face competition from nearby competitors, as well as other recreation alternatives. The addition of Carmike ought to help ease this problem somewhat. The acquisition boosts AMC’s portfolio by 276 theaters in 41 states, mostly in mid- and small-sized markets with fewer entertainment options.
Digital Exposure: Unable to compete with the convenience of a living room, AMC and its competitors sought to makeover the in-theater experience to attract more filmgoers. This has included ambitious theater upgrade campaigns, amenity menu overhauls, and a focus on larger-than-life premium format screens. And, from implementing mobile ticketing options to reseating rooms with luxury recliners, the company has stayed mostly ahead of the curve amongst the national chains. Every one of its screen uses digital screen technology, making it easier for operators to cater their screening schedules to the local audience. Nearly 50% of its total screen count is 3D-enabled, while a contract with Dolby (DLB) will see the audio pioneer design immersive, state-of-the-art premium screening rooms. There are now 26 installed Dolby Cinema at AMC screens, more than double the 12 in operation at the end of last year.
Weaknesses:
Changing Consumer Preferences: On-demand streaming services, which are available both at home and on mobile devices, have invariably hurt the film exhibition business. Many of these platforms have also invested heavily in original programming, rather than overpaying for second-run content. AMC is constantly looking for ways to stoke attendance higher. Luxury seating and expanded food options, with beer and wine menus in some locations, are just a few of the varied ways the AMC has attempted to reinvigorate interest in its movie theaters. Recent years have seen an increasing dependence on concessions revenues and premium ticket upcharges to lift the top line, which are effective, but not sustainable. The average U.S. ticket price is only a dollar-plus-change less than a full month’s subscription to Netflix.
Reliance on Hollywood: Theater attendance levels largely hinge on the popularity of the films on screen, so AMC is subject to the quality and marketability of new motion pictures. This works out swimmingly for the company when a new Star Wars or Marvel film hits screens, but can add volatility to results if a new release flops. Additionally, the U.S. box office is highly concentrated, with only seven distributors accounting for nearly 90% of 2015’s total haul. This means Disney (DIS -Free Walt Disney Stock Report) and others can often drive up screening fees for highly anticipated fare. Thus, bigger is better if you’re a nationwide chain. The Carmike-boosted screen count will help to bolster AMC’s leverage at the negotiating table, but the popularity of more-convenient viewing alternatives will continue to threaten the overall health of the business.
Opportunities:
International Expansion: Widened exposure in foreign markets is one way AMC is looking to shore up growth prospects in the future. Lost in the coverage of the Carmike deal was the company’s announced intention to purchase Odeon and UCI Cinemas, the largest theater chain in Europe. The move represents a bold and definitive entry into Europe, adding 242 cinemas across the U.K., Spain, Italy, and Germany, and several other nations. Meanwhile, Wanda’s ownership of AMC always leaves open the opportunity for a relatively smooth entrance into the world’s fastest-growing movie-going market.
On-Screen and In-Theater Innovation: The mutually beneficial relationship with IMAX has seen the company latch its fortunes onto one of the theater sector’s few bright spots. AMC boasts the largest IMAX presence in the United States, with a 44% market share. The relationship will likely grow in coming years, especially in some of its newly acquired European locations. The AMC Stubs loyalty program continues to grow, with roughly 22%, or 4.4 million, of its customer households enrolled in the rewards program (as of September 30th). Ongoing improvements to its convenience, variety, and comfort ought to incentivize more of its customers into joining the program.
Threats
Regional and Niche Competition: In addition to vying with Regal, Cinemark (CNK), and other national exhibitors, for market share, AMC faces intense competition from smaller-sized. This can be troublesome, as these locally focused theaters, such as those operated by Harkins, Showcase, and Bow Tie, often boast stronger footholds and inspire more loyalty than AMC. Modernized art house-style venues offer more intimate customer experiences, a difficult aesthetic to replicate on the national level. Not to mention that the customer needs to decide on going to a movie theater before selecting the chain, which is no guarantee in today’s fractured entertainment landscape.
Accelerated Decrease in Theater Attendance: We believe that eulogies for the domestic exhibitor market are well overblown. Still, AMC would likely be hit hard if a major studio opted out of the longstanding theater-first ecosystem and found success on a standalone streaming app. The company has shown willingness to experiment with release cycles. It agreed to shorter windows for several Paramount releases last year, a signal to us that the exhibition side is trying to evolve with the times. But, only time will tell if the companies’ joint attempt to redefine the theater succeeds.
Conclusion
As far as the movie exhibition industry goes, we think AMC Entertainment is arguably the top choice for stability and long-term prospects. Years of upgrades and reseating ought to continue to pay off. The potential for growth in smaller and foreign territories ought to buoy sentiment around the stock as recent acquisitions are integrated into the business. That said, secular threats and changing consumer preferences will continue to add risk here. Long-term success will depend on AMC’s ability to attract a new generation of consumers back into movie theaters. We like what the company has done to begin this process, though elevated costs related to these forward-looking initiatives could impede consistent profit growth. – Robert Harrington
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
