Analyst: AMC Entertainment’s Focus Should Be Quality Over Quantity

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Q1 revenues upside driven by higher admissions revenues, but EPS lower than expected due to higher other operating expenses and depreciation. Revenue was $623 million, compared with our estimate of $618 million, and the consensus estimate of $617 million. Adjusted EBITDA (excluding NCMI distributions) was $85 million, compared with our estimate of $93 million. EPS was 5 cents versus our estimate of 10 cents and the consensus estimate of 1 cent.

AMC (NYSE:AMC) continues to execute well on its strategic roadmap and outperformed industry averages, emphasizing quality over quantity in order to drive revenue growth beyond M&A. The company is focused on increasing productivity from its current asset base as opposed to focusing on M&A. Management believes that there are still significant opportunities ahead to drive incremental returns from its current assets and estimates that it has completed only 25-30 percent of the retrofit opportunities outlined in the S-1.

AMC continues to innovate and introduce new concepts, and we believe the company can stay ahead of competitors by focusing on quality over quantity. The company disclosed details regarding generation 2.0 of its recliner reseat initiative, which removes only half of the existing seats instead of the existing concept that requires two-thirds of seats to be removed. Earlier this year the company also revealed Red Kitchen, AMC’s fast-casual version of Dine-In Theatres. Management expects the next generation of recliner re-seats and the Red Kitchen concept to allow the company to deploy comfort and dine-in initiatives deeper into its existing portfolio than the initial concepts would have allowed.

We are lowering our FY:14 estimates for revenues to $2.84 billion from $2.86 billion, adjusted EBITDA (excluding NCMI distributions) to $483 million from $488 million, and EPS to 91 cents from $1.16 to reflect the quarter’s results and a lower screen count. We are initiating our FY:15 estimates for revenues of $2.95 billion, adjusted EBITDA (excluding NCMI distributions) of $536 million, and EPS of $1.17. The company did not provide forward guidance.

Maintaining our OUTPERFORM rating and price target of $29. We arrive at our $29 price target by applying an 8.5x multiple to our 2014 EBITDA estimate of $484 million and adding the value of AMC’s 19.1 million shares of National CineMedia. This is a slight premium to the other exhibitors, which we feel is warranted considering AMC’s high-return initiatives and superior film rental margins.

Michael Pachter is an analyst at Wedbush Securities. 

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