Buy, Sell or Hold? AMC Entertainment (AMC) and Imax (IMAX)

The entertainment industry has been severely affected due to lingering macro headwinds and shifting consumer spending behavior, as high inflation dampens discretionary spending. However, the industry is expected to witness robust growth in the long term, thanks to the growing demand for digital entertainment worldwide amid the rising popularity of OTT platforms and online gaming.

Given this backdrop, struggling entertainment stock AMC Entertainment Holdings, Inc. (AMC) is best avoided now. On the other hand, investors could hold IMAX Corporation (IMAX) and wait for a better entry point in this stock.

The Labor Department reported that the Consumer Price Index (CPI) increased just 0.1% in May, bringing the annual rate down to 4% from 4.9% in April. However, core inflation, which excludes volatile food and energy prices, rose 0.4% monthly and remained 5.3% higher than a year ago, indicating that while price pressures have eased a little, consumers are still under fire.

Moreover, inflation is still well above the Federal Reserve’s target of 2%. Although the Fed has decided to hold interest rates steady for June, it signaled two more potential rate hikes before the end of this year. Since March 2022, the Federal Reserve has already raised its benchmark interest rate ten times in a row to a range of 5%-5.25% in an attempt to fight high inflation.

Amid higher interest rates, lingering effects of the recent banking crisis, and other macroeconomic challenges, the odds of the economy sliding into a recession are relatively high. During recessionary periods, consumers adjust their spending. Households are less likely to spend on discretionary items, including entertainment and recreational activities.

While the entertainment industry has been under immense pressure recently due to several macroeconomic headwinds, the industry’s long-term prospects look bright. Streaming video services, social media, and mobile applications are helping to enable new business models and reshape the entertainment and media industry.

New digital platforms have drastically changed how movies and entertainment programs are consumed. According to a report by Expert Market Research, the global online entertainment market is projected to reach $865.60 billion by 2027, growing at an 18.8% CAGR. The surge in popularity of the OTT (over-the-top) media services and online gaming should propel the digital entertainment demand globally.

Moreover, the United States dominates the online entertainment market, driven by the increasing availability of advanced digital infrastructure, a significantly high digital literacy rate, rapid adoption, and a favorable response to technological advancements.

While avoiding fundamentally weak entertainment stock AMC could be wise now, investors could add IMAX to their watchlist and wait for a better entry point in this stock.

Let’s discuss the fundamentals of these stocks in detail.

Stock to Avoid:

AMC Entertainment Holdings, Inc. (AMC)

AMC engages in the theatrical exhibition business. The company owns, operates, and has interests in approximately 950 theatres and 10,500 screens worldwide.

AMC’s trailing-12-month gross profit margin of 8.90% is 82.1% lower than the industry average of 49.76%. Its trailing-12-month EBITDA margin of 1.53% is 91.5% lower than the industry average of 18.05%. Also, the stock’s trailing-12-month net income margin of negative 21.36% compares to the 7.35% industry average.

AMC’s forward EV/Sales of 2.58x is 44.2% higher than the industry average of 1.79x. Likewise, the stock’s forward EV/EBITDA of 35.66x is 320.1% higher than the industry average of 8.49x.

AMC’s revenues increased 21.5% year-over-year to $954.40 million in the first quarter that ended March 31, 2023. However, its operating loss was $108.20 million for the quarter. The company reported an adjusted net loss of $179.70 million, while its adjusted loss per share was $0.13. In addition, its cash outflows from operating activities came in at $189.90 million.

Analysts expect AMC’s revenue for the fiscal year (ending December 2023) to increase 14.8% year-over-year to $4.49 billion. However, the company is expected to incur massive losses for at least two fiscal years.

Shares of AMC have plunged 11.5% over the past six months and 35.1% over the past year to close the last trading session at $4.70.

AMC’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

AMC has an F grade for Stability and a D for Quality, Sentiment, and Value. Within the Entertainment-Movies/Studios industry, the stock is ranked last among five stocks.

To see additional POWR Ratings of AMC for Growth and Momentum, click here.

Stock to Hold:

IMAX Corporation (IMAX)

Headquartered in Mississauga, Canada, IMAX operates as a technology platform for entertainment events globally. The company’s segments include IMAX Technology Network; IMAX Technology Sales and Maintenance; and Film Distribution and Post-Production. It runs a network of IMAX systems comprising commercial multiplexes and institutional facilities in 87 countries and territories.

On June 5, IMAX catapulted to a $20 million debut for Sony Pictures’ “Spider-Man: Across the Spider-Verse” at the global box office that weekend. In a sign of the rising popularity of animation across the IMAX global network, the stellar sequel marked the company's second-biggest animated opening of all time. Such incredible numbers reflect IMAX’s robust growth and market position.

On May 17, IMAX and Kinepolis Group, a Belgian-based cinema chain, announced a global expansion of their longstanding partnership with eight state-of-the-art IMAX® with Laser systems across Europe, Canada, and the U.S. The new agreement almost doubles IMAX’s footprint with this outstanding international exhibitor, Kinepolis, and its subsidiaries, including a first-time collaboration with MJR Cinemas.

“In a year in which IMAX continues to drive very strong sales activity, this agreement marks our biggest multi-territory deal to date — underscoring the surging demand for the IMAX Experience across regions and even into new markets,” said Rich Gelfond, IMAX’s CEO.

IMAX’s trailing-12-month gross profit margin of 53.58% is 7.7% higher than the 49.76% industry average. Likewise, the stock’s trailing-12-month levered FCF margin of 16.03% is 118.2% higher than the 7.35% industry average.

In terms of forward non-GAAP PEG, IMAX is currently trading at 0.10x, 94% lower than the industry average of 1.66x. However, the stock’s forward EV/Sales of 3.23x is 80.6% higher than the industry average of 1.79x, while its forward EV/EBIT multiple of 21.11 is 40.4% higher than the industry average of 15.03.

For the first quarter that ended March 31, 2023, IMAX’s revenues increased 98.6% year-over-year to $17.82 million, and its gross margin grew 57.5% from the year-ago value to $50.05 million. Its income from operations was $11.40 million, compared to a loss of $9.03 million in the prior-year period. Also, the company’s net income came in at $5.12 million versus a loss of $11.95 million in the previous year’s quarter.

Furthermore, the company’s net income per share attributable to common shareholders was $0.04, compared to a loss per share of $0.23 in the same quarter in 2022. As of March 31, 2023, its cash and cash equivalents were $99.25 million, compared to $97.40 million as of December 31, 2022.

The consensus revenue estimate of $378.70 million for the fiscal year (ending December 2023) reflects a 25.9% year-over-year improvement. Likewise, the consensus EPS estimate of $0.80 for the current year indicates a 1,234.3% rise year-over-year. Moreover, IMAX has surpassed the consensus revenue estimates in all four trailing quarters, which is impressive.

The stock has gained 22.1% over the past six months and 19.1% over the past year to close the last trading session at $17.96.

IMAX’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system.

IMAX has a B grade for Growth and Quality. It has a C grade for Value. The stock is ranked first out of five stocks within the same industry.

In addition to the POWR Ratings I’ve just highlighted, you can see IMAX’s ratings for Momentum, Stability, and Sentiment here.

What To Do Next?

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AMC shares fell $0.03 (-0.64%) in premarket trading Tuesday. Year-to-date, AMC has gained 15.48%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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