AMC Entertainment (NYSE:AMC) was all but left for dead at one time during the coronavirus pandemic, and justifiably so as it danced along the precipice of bankruptcy.
Yet agreements with its lenders have helped shore up its finances, and almost all of its theaters have reopened after being closed for five months. Here’s why I think the theater operator could be one of the best stocks to buy today.
Hollywood will mount a comeback. It wasn’t just theaters that were forced to close due to the COVID-19 outbreak, but the entire filmmaking industry. That forced studios to release many of the big-name productions that were already in the can straight to streaming video platforms.
Yet the studios need the theaters just as much as the movie houses need the films. Streaming can’t replace the hundreds of millions, sometimes billions, of dollars showing a movie on the big screen generates.
Just look at Walt Disney. It had big hopes for its live-action remake of Mulan, but the pandemic forced its delay, and the company eventually just released it to the Disney+ platform. Although it may have caused downloads of the streaming app to surge, Disney is unlikley to recoup the estimated $200 million budget for the film through the streaming format alone.
A number of other studios have chosen to wait until next year to release their films, including such titles as A Quiet Place 2, Top Gun 2, and Wonder Woman 1984.
Even without the blockbusters everyone has been waiting for, AMC announced that more than one million moviegoers have returned to its theaters as pent-up demand for dinner and a movie overcame whatever reservations they may have had about going to the theater during a pandemic. With bigger-budget films to come, AMC can expect to draw in even bigger audiences.
A small-screen future
Yet it cannot be denied that streaming is going to continue having an effect on movie viewership, which is why AMC made a deal with Comcast‘s Universal Pictures to get a cut of revenue generated from titles that go to the small screen in exchange for shortening the window of exclusivity.
The bulk of a movie’s box office is generated in the first few weeks of its showing, so allowing studios to then cart a film off to streaming — and being a partner in the revenue generated from that — lets AMC cash in twice. The company has the potential to earn more than Cinemark and Regal do on a movie’s long tail.
The window of exclusivity at theaters has been narrowing for some time, but this significant leap forward to just 17 days seems to strike the right balance, as it keeps the theater operator in the loop after the film leaves the cinema.
It also gives AMC a chance to focus more on the premium moviegoing experience that allows it to charge more for a ticket while selling marked-up food and drinks at its dine-in theaters. More studios will likely want to cut a similar deal, and even the other theater operators will probably follow suit.
With the price of admission
AMC is one of the largest theater operators in the world. While the pandemic left it exposed, that scale also gives it a competitive edge during the recovery because of its geographic diversity. It was able to survive because of its size, while the lights over many independent movie houses may have gone dark forever.
The pandemic absolutely crushed AMC Entertainment’s valuation and caused it to turn into a loss-generating operation, but a return to economic normalcy will allow AMC to regain its footing once more. The stock has more than doubled from the lows it hit in April, but shares still trade 56% below their 52-week high and 33% below where they started the year. The company is valued at just a fraction of its annual revenue, so the market is looking for its profits to rebound as the upheaval from COVID-19 abates.
Because AMC Entertainment stock is still so discounted, and its real recovery is only just beginning as consumers return to theaters, it could be one of the best stocks to buy today.