Clearly, the stakes are high -- and No. 1 theater operator Regal Entertainment Group (RGC) is feeling the heat. This might be a good time to go long on AMC and short Regal.
So what is the AMC story? And what's the best way to play this dynamic? Below, we unveil one of the most exciting money-making opportunities in this volatile and uncertain market.
Thus far, AMC has been a distant second to Regal. Regal can boast over $3 billion in revenues, double-digit margins and over $150 million in annual profits. AMC's $2.8 billion sales, 7.7% operating margin, less than $100 million profit (on a trailing 12-month basis) and marginal free cash flow are all less than impressive.
All of this is headed for a massive transformation, making AMC one of the most prominent growth investments this year.
AMC, controlled by Chinese property and investment firm Dalian Wanda Group since 2012, is dishing out $30 per share in cash to buy all of Carmike's outstanding shares. In return, it stands to gain Carmike's 276 theaters with 2,954 screens. Combine this with AMC's 387 locations and 5,426 screens, and this comes to a staggering 663 theaters and over 8,300 screens -- far ahead of Regal with 572 theaters and 7,369 screens. Carmike's smaller city footprint in the South and Southeast is well complemented by AMC's urban focus primarily in the Northeast, Midwest and West. Together, the Carmike-AMC combination could really up the ante and give Regal a run for its money when Hollywood comes out with its blockbusters for 2017 and 2018.
After a slump across 2015, AMC's shares have now turned positive on total returns (including dividends). In comparison, Regal Entertainment's shares have been solid at 4.35% total returns even as diversified media stocks are down over 5% in line with the S&P 500.
While AMC will carry more debt in order to acquire Carmike, both companies should manage to eke out synergies and cost savings from this deal. The company's guidance on cash flow in 2017 and beyond is a good sign. AMC's most recent results show that the company grew revenue from admissions as well as food and beverage. Carmike exhibited similar trends, which underlines the strength of their businesses and could grow even stronger, putting AMC in a group of growth stock winners for 2016.
As AMC and Carmike become one, we expect investors to receive improved dividend growth, up from levels below 3% for AMC. In absolute terms, Regal Entertainment offered a higher 88 cents dividend in 2015 (and yield of 4.23%), but AMC is close behind, paying 80 cents per share in 2015 , up from 60 cents a year earlier.
In terms of earnings growth, AMC seems like a better pick with five-year earnings-per-share (EPS) growth projected at 19.25% each year compared to RGC's less than 10% (9.91%) figures. This could be why analysts are valuing AMC's shares at a price/earnings growth (PEG) ratio of just about 1.11 while RGC is trading at, in our opinion, an unjustifiable PEG ratio of 2.03.
We think AMC's shares could soon top $35 levels, translating to an over 20% money-making opportunity while Regal's shares look fully valued at around $20 per share at the moment, with a real risk of a downside.
Our advice: Prudence should direct you towards buying more of AMC's shares and trimming back on Regal.
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