Analyzing Entertainment Stocks: AMC Entertainment (AMC) and Warner Music Group (WMG)

The entertainment industry has been put under strain amid the macroeconomic headwinds. So, I think it could be wise to wait for a better entry point in Warner Music Group Corp. (WMG) for reasons discussed throughout this article. However, AMC Entertainment Holdings, Inc. (AMC) is best avoided considering its weak fundamentals.

Inflation caused Americans to reduce their discretionary expenditure. Fears of a recession may further slow entertainment demand, hampering the industry's growth. According to Statista, the United States is 56.2% likely to enter an economic recession by September 2024.

The shift in customer behavior has reduced revenue for entertainment companies, including those operating in movie theaters, concert venues, and amusement parks.

As a result, AMC and WMG have faced significant challenges in maintaining their financial stability. AMC, being one of the largest movie theater chains globally, has experienced a decline in ticket sales due to the shift towards streaming platforms and online content consumption. Similarly, WMG has witnessed a decrease in revenue from live concerts and events as people have become more hesitant to attend large gatherings.

Let’s delve into the fundamentals of the featured stocks.

Stock to Hold:

Warner Music Group Corp. (WMG)

WMG operates as a music entertainment company in the United States, the United Kingdom, Germany, and internationally. It operates through Recorded Music and Music Publishing segments.

While WMG’s trailing-12-month CAPEX / Sales of 2.14% is 47.8% lower than the industry average of 4.09%, its trailing-12-month ROCE of 192.22% is significantly higher than the industry average of 4.05%.

For the fiscal second quarter that ended June 30, 2023, WMG’s revenues increased 9% year-over-year to $1.56 billion. Its adjusted operating income was $146 million, rising 25.6% year-over-year.

However, its adjusted net income decreased marginally year-over-year to $146 million, and its free cash flow decreased 12% from the previous-year quarter to $113 million.

Analysts expect WMG’s revenue to increase 6.9% year-over-year to $6.46 billion for the year ending September 2024. Its EPS is expected to grow 35.5% year-over-year to $1.34 for the same period. Over the past year the stock has gained 30.9% to close the last trading session at $32.90.

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

WMG also has a C grade for Growth, Stability and Quality. It is ranked #4 out of 6 stocks in the Entertainment - Movies/Studios industry. Click here for the additional POWR Ratings for Value, Sentiment and Momentum for WMG.

Stock to Sell:

AMC Entertainment Holdings, Inc. (AMC)

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

AMC’s trailing-12-month gross profit margin of 10.74% is 77.9% lower than the industry average of 48.63%. Its trailing-12-month negative EBIT margin of 5.33% compares to the industry average of 8.32%.

AMC’s revenues for the fiscal second quarter that ended June 30, 2023, stood at $1.35 billion. Its operating costs and expenses increased 6.8% year-over-year to $1.26 billion. The company’s adjusted net loss stood at $6.60 million. As of June 30, 2023, AMC’s total assets stood at $8.70 billion compared to $9.14 billion as of December 31, 2022.

Street expects AMC’s EPS to come at negative $2.53 for the fiscal year ending December 2023. The stock has lost 80% over the past nine months to close the last trading session at $10.72.

The stock has an overall D rating, translating to a Sell in our POWR Ratings system.

AMC is ranked #last in the same industry. It has an F grade for Stability and a D for Quality. Beyond what is stated above, we’ve also rated AMC for Growth, Sentiment, Momentum and Value. Get all AMC ratings here.

What To Do Next?

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WMG shares were trading at $32.54 per share on Monday morning, down $0.36 (-1.09%). Year-to-date, WMG has declined -5.56%, versus a 15.08% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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