Weekly Research Briefing: Got Popcorn?

June 08, 2021
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"Sell crazy someplace else... we're all stocked up here." (Jack Nicholson, 'As Good As It Gets')

An appropriate movie line for a current look at the movie theater industry. This is an easy analysis because we have some direct industry comparisons, and mergers & acquisitions have run through the movie theater industry forever. I put pen to paper because I was interested. So grab a box or a bucket and let's dig into the newest retail stock bubble.

Post-COVID, the industry has obviously changed for the worse. All movie viewing went into the home for 12+ months. Consumers are more comfortable viewing and buying first run films at home. Some studios can make as much money, if not more at home through a direct purchase. See "Cruella" at $30 on Disney Plus this weekend. And consumers can save a bit by not going to the theater ($10/ticket plus $5+ each on concessions). Movies are still great for the big pictures and for teenagers who want to get away from mom and dad. But for many, filling up an indoor space and breathing other people's air is going to take a while to return.

So here is a chart from 2018 of the top theater chains in the U.S. & Canada...

Since this chart, the U.K. based Cineworld, which owned Regal, also bought Cineplex. So basically, the top three players control over 1/2 of the screens.

Top U.S. / Canadian Circuits

(National Association of Theater Owners)

Most acquisitions done over the last 20 years have been for 8x EBITDA...

The last two big deals were done at over 10x EBITDA. Prices paid gives us some valuation metric that big money and banks are willing to lend. However, I highly doubt that they will be lending at double digit valuation metrics anytime soon.

Theater Acquisitions

(Source: Media reports, Capital IQ, J.P. Morgan estimates.)

Let's look at today's valuation of the top three players...

What you will find is that they are all pretty similar. Same mix of U.S. exposure and ticket/concession sales. Margins differ due to lease accounting (especially in the U.K.), but the debt is adjusted to get everything apples to apples. For 2022 revenue projections, I took the 2019 figure and cut everyone by 20%. Then I gave each player the gift that their margins would fully recover (unlikely, but let's go for it). I also threw in the new shares and cash from last week into the AMC data.

In looking at the EV/EBITDA valuation metric closely, I have determined that either my Excel formulas are broken or there is no way that the Efficient Market Hypothesis exists. Seriously, how could the financial markets be so wrong?

Movie Theaters

(Source: Publicly available data for AMC Entertainment, Cinemark Holdings, and Cineworld Group as of 06/07/21.)

Tweet from @morganhousel

All of the largest past owner's of AMC have left the theater...

But wild to see one of them run back in to convince the company to give them a few boxes of Junior Mints.

Jason Mudrick stayed a shareholder in cinema chain AMC Entertainment for about as long as it takes to screen Titanic. And for the cinema company, that may have been an acceptable outcome. The US investor’s firm, Mudrick Capital, acquired a $230m stake in the theatre chain, a transaction announced early on Tuesday.

By midday, Mudrick was out again. He may have netted a 10 per cent to 20 per cent gain, judging from intraday prices.

The crucial point is that he bought the shares from AMC itself. This announced it would go on “offense”, using the capital to buy cinemas crushed by the pandemic.

The stock has nearly tripled in recent weeks on the strength of meme-driven frenzy. The company has no material news. And no objection to topping up its capital.

Large shareholders such as Silver Lake and Dalian Wanda — and, of course, Mudrick — have sold out recently. In their place are 3m retail investors pushing equity value to its highest level for four years.

(FinancialTimes)

Even the AMC management team and the board members are selling the stock...

AMC Entertainment Holdings Inc. executives and directors sold $8 million in shares of the theater chain Thursday, cashing in on the soaring price of the most-popular meme stock.

Two board members and four executives sold at near record prices, following an eye-popping surge in the stock this week, regulatory filings on Friday showed. Among them were Gary Locke, a former Chinese ambassador who is up for re-election to the board at the company’s July 29 annual general meeting, and Carla Chavarria, the company’s head of human resources.

Among the six people who sold, Chavarria reported the highest proceeds -- $2.53 million after selling more than 40,000 shares at $62.67. The stock made an all-time high of $72.62 a day earlier.

(Bloomberg)

An important AMC warning label that I can only recall from some Biotech prospectuses...

As the company itself sells stock to the public, it is boldfacing a warning that buyers should be prepared to risk losing all of their investment.

AMC

(AMCTheaters)

Where does the responsibility and fiduciary role lie for the CEO of AMC Entertainment?

Should a board and management team prioritize a shareholder base that can buy and liquidate their holdings at no cost in a matter of seconds over the employees and customers of the enterprise? What about for a long term or strategic shareholder?

The movie theater chain was recently on the brink of bankruptcy, and still faces huge problems. But its price at one point was more than four times the target price of even a bullish Wall Street analyst—showing the gap between retail investors’ and professionals’ expectations for the money-losing company. The stock was 80% owned by individuals as of March. “My AMC” was recently trending on Twitter alongside social media hashtag #AMCArmy.

AMC’s management is welcoming that army with open arms. Investors who own shares in the theater chain can sign up for perks including a free large popcorn, as well as exclusive screenings. “Many of our investors have demonstrated support and confidence in AMC,” Chief Executive Officer Adam Aron said in a statement announcing the program. “After all, these people are the owners of AMC, and I work for them.”

(Bloomberg)

Note the publication date...

Fortune Magazine cover

(@DanielTNiles)

Anyone with one gray hair has seen this before...

“I used to think you need like $10,000 to invest in the stock market,” she said. “You can do it with as little as $25.” She bought 11 shares of AMC in January for $100 because she expected the stock to rise as movie theaters reopened around the country. She watched as other people also bought in, and gathered on Discord, Reddit, and Twitter to celebrate and joke around...

Some of that same spirit is driving other investors too. Brittany Harrell, a 33-year-old who works at a nonprofit in Virginia, put $180 into AMC through her Stash app in January. She has since made about $500.

At the time she bought, she simply had a hunch. “I was bored and I thought I’d throw some money at AMC,” she said. Since then, she’s enjoyed the ride, and finds the chatter around the stock funny. But she’s also been reflecting on how easy-to-use investing apps that don’t charge commissions for trading have opened up a world that she didn’t expect to be a part of...

For others, the trade has been a way to gamble some of their fun money. “For me this trade is leisure fun,” said Scott Gaught, a 36-year-old information technology specialist in Atlanta. “I’m not trying to make hand over fist money.”

For Gaught, trading stocks has been a substitute for more traditional gambling, which he liked to do at casinos until last year. “Since the pandemic, I’ve had to find other ways to exercise that pleasure,” he said. Gaught is less interested in the narrative around AMC of retail investors taking on hedge funds that had sold the stock short, hoping to profit as it fell. Like other investors, he said he had a hunch in January that movie theaters might start doing well and saw that ticket sales had been rising for movies like A Quiet Place Part II.

But he also thinks he may start trading stocks a little bit less in the future. One of his old leisure activities is back. “I’m going to Vegas in the middle of July,” he said.

(Barrons)

If you are a passive index investor who thinks that the meme stock craze doesn't affect you, you should think again...

Tweet from @Fxhedgers

But not entirely clear what effect moving AMC from the Small Cap to the Big Cap index could mean for the impact of the stock price in the near term...

AMC could be immediately sold by the small cap index funds, but maybe not immediately bought by the large cap index funds.

AMC is up more than 2,100% this year and GameStop over 1,200% -- with commensurate increases to their weighting in the Russell 2000 small-cap stock index. The two together now make up more than 1.1% of that gauge. But their enlarged market caps, with AMC at $24.6 billion and GameStop at $18.4 billion, put them squarely in line for a move to the Russell 1000 index of the biggest American companies.

“The graduation of these high-fliers could be the beginning of the end of their epic run,” Wells Fargo analysts Christopher Harvey, Gary Liebowitz and Anna Han wrote in a note Friday. While there may be some buying beforehand from small-cap portfolio managers who are underweight those companies, that is likely to change for the stocks as the reconstitution takes effect, according to the analysts.

“Once they graduate, their index representation drops (i.e., less impactful),” and portfolio mangers will have another year to wait for a shakeout on the stock prices, they said.

(Bloomberg)

Even active investors are impacted as some of these meme stocks rip through their favorite ETFs...

The Small Cap Value ETFs were among my favorite coming out of the COVID crisis a year ago. Lots of small financial and industrial names trading at ridiculous valuations that were poised to recover with the economy. That may no longer be the case.

One funny wrinkle in the great 2021 retail investing saga is the effect the rapidly increasing market capitalisation of these companies is having on index funds and ETFs.

Our favourite so far? Well the composition of the iShares Russell 2000 Value ETF has particularly tickled us. Ostensibly designed to give investors “exposure to small public U.S. companies that are thought to be undervalued by the market relative to comparable companies” in the classic value investor style, its two largest holdings are currently AMC and Gamestop.

Indeed, according to FactSet data, Gamestop now makes up 0.92 per cent of the ETF, up from just 0.03 per cent in June 2020, while AMC is now 0.78 per cent of the fund:

Top 15 Holdings Portfolio Trend

(FinancialTimes)

One clear short-term winner from the meme craziness is the NYSE...

In fact, one day last week, four of the top meme stocks (AMC, BB, BBBY & NOK) were 25% of the intraday volume.

AMC volume as % of NYSE volume

(@LongviewEcon)

Important to note that rampant retail speculation is not just a U.S. phenomenon...

@EconguyRosie: Der Spiegel: "Bitcoin, stocks, derivatives — the new risk appetite of the Germans." You know you're in a huge bubble when typically conservative Germans join the party.

Cover of Der Spiegel

(@derspiegel)

Okay, onto the real world. The extra $300/week in unemployment payments will continue until the end of September...

"And temporary boost in unemployment benefits that ended -- that we enacted, I should say, helped people who lost their jobs through no fault of their own and who still may be in the process of getting vaccinated but it's going to expire in 90 days. That makes sense, it expires in 90 days."

(President Biden on Friday)

And Payroll Employment growth still has a long way to go to catch the number of Job Openings in the U.S...

Tweet from @RBAdvisors

The monthly Consumer Price Index data drops Thursday morning. Treasury Secretary Janet Yellen seems fine with future hot numbers…

Treasury Secretary Janet Yellen said President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year and higher interest rates.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London…

Biden’s packages would add up to roughly $400 billion in spending per year, Yellen said, contending that’s not enough to cause an inflation over-run. Any “spurt” in prices resulting from the rescue package will fade away next year, she said.

“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” the former Federal Reserve chair said, adding that “we want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing -- that’s a good thing.”

(Bloomberg)

Gradual rising rates are great for Financial companies…

Controlled higher inflation and short- & long-term interest rates would lift Net Interest Margins (NIM), which could lift Bank earnings by 30% over a two-year period.

Gradual rising rates

(Goldman Sachs)

Expected Earnings growth for the S&P 500 has begun to slow down...

Likely due to the end of earnings season and the beginning of summer vacations. There were a lot of company meetings and industry conferences this month. However, analysts might be waiting to see what will happen with the many supply chain disruptions and higher cost of labor hitting the books.

S&P 500 EPS growth expectations rose slightly more this week

(@EarningsScout)

Looks like a big week for Energy stocks as they attempt to breakout and further lead this market...

XLE Energy Select Sector SPDR Fund

(@hmeisler)

Value stock industries continue to ring all the right bells in 2021...

Value stock industries

(@bespokeinvest)

Speaking of Value stocks, look at what is happening to the valuation of the World Momentum Index...

@Not_Jim_Cramer: Value stocks becoming momentum stocks in the current environment creates one of the largest rebalancing effects ever...

MSCI World Momentum Index

You may not invest in China, but your portfolio will never be able to avoid China...

Investing in China

(@TheTranscript_)

Thanks to Will Ferrell, you know that Norway is the leading electric car market in the world...

Electric Mobility: Europe Races Ahead

(@statistacharts)

And Norway's best-selling car is now the Ford Mustang Mach-E...

Ford Motor Co's electric Mustang Mach-E topped Norway's car sales in May, the first full month of registrations for the crossover vehicle in the small but influential Nordic market, national data showed on Tuesday.

Battery electric vehicles made up 60.4% of all new cars sold in Norway last month, the Norwegian Road Federation (OFV) said, up from 43.1% a year ago as the country seeks to become the first to end the sale of petrol and diesel engines by 2025.

By exempting fully electric vehicles from taxes imposed on internal combustion engines, Norway has turned its car market into a testing ground for automakers seeking a path to a future without fossil fuels.

A total of 1,384 electric Ford Mustangs were registered in May for a 10% share of Norway's overall car market, ahead of Toyota's RAV4 hybrid vehicle and Skoda's electric Enyaq. Tesla Inc's Model 3 took sixth place.

(Reuters)

Airline companies are seeing a full recovery in domestic leisure travel...

But they will need business and international to recover before most of them can make any profits.

DAL said it expects a full restoration of domestic leisure travel in June, up from 60% in March/it expects to generate pretax profit in the second half of the year and sees a pretax loss of $1B- $1.2B for the June quarter, compared with its prior guidance of $1B-$1.5B;

AAL said it generated cash in May for the first time since the pandemic/said the 7-day moving average of net bookings was about 90% the level in the same period in 2019/said it expects the strength in bookings to continue through the end of Q2 into Q3/still sees Q2 system capacity to be down 20% to 25% and for revenue to be down about 40% from Q2 2019.

(@HammerstoneMar3)

Tough news from Flextronics this weekend if you plan on buying anything with electricity running through it...

The global chip shortage disrupting the car industry and threatening the supply of consumer technology products will last for at least another year, one of the world’s largest electronics contract manufacturers has warned.

The forecast from Flex, the world’s third-biggest such manufacturer, is one of the gloomiest yet for a crisis that is forcing car and consumer electronics groups to re-examine their global supply chains.

A rapid rebound in vehicle sales combined with a lockdown-driven boom in games consoles, laptops and televisions has left the world’s chipmakers overwhelmed by the sharp increase in demand.

Singapore-based Flex has more than 100 sites in 30 countries and manufactures devices and electronics for companies including Ford, British household appliances designer Dyson, UK online grocer Ocado and US computer and printer maker HP. Its position in the supply chain makes it a large buyer of chips…

Pandemic-related problems with supply chains have been compounded by the blocking of the Suez Canal in March, the extreme cold weather in Texas, and a recent fire at a large chip factory in Japan.

Revathi Advaithi, chief executive of Flex, said the disruption wrought by the pandemic was prompting its multinational customers to take a far more serious look at restructuring their supply chains than the trade war between the US and China ever did. This could include making them more regional, she added.

(FinancialTimes)

As chip companies make plans to become more local, it is going to require a big investment in new semiconductor capex which now has a hurricane at its back...

TSMC announced it would spend US$100bn on capacity expansion in 2021-2023 to cope with the expected strong and longer semiconductor sector cycle, driven by 5G/HPC/AI/Automotive and to regain customers' trust in the foundry business by addressing capacity shortage issue. Capital intensity reached 55% in 2021, higher than the 35% avg in the last 7 years.

Capex spike

(Goldman Sachs)

Morgan Stanley calculates an Amazon grocery order is profitable above $50...

And the profitability of the order accelerates rapidly as you gather more items for the basket and offset that delivery cost. Good luck to any store or restaurant trying to deliver less than $25 in goods.

Same day grocery model

(Morgan Stanley)

A major event in the world of Private Equity over the weekend...

The family owners of Medline Industries sold to a group of private equity firms in the largest buyout since 2008. The family will retain control of the company while getting some estate liquidity and the management team will remain in place. A great outcome for everyone involved. Expect more big deals like this one in the future.

“This could be the transaction that opens up the floodgates,” said Dusty Philip, co-chairman of global M&A at Goldman Sachs Group Inc., which advised Medline. “You have ideal conditions for large LBOs: low interest rates, aggressive financing markets and a significant amount of dry powder.”

Indeed, buyout firms are now sitting on more than $1.6 trillion of unspent cash, according to data provider Preqin—and that doesn’t take into account the billions that big institutional investors are clamoring to invest directly in deals.

Based in Northfield, Ill., Medline is a little-known but major competitor in the field of medical equipment. It manufactures and distributes equipment and supplies used in hospitals, surgery centers, acute care and other medical facilities in more than 125 countries.

Medline’s vast product lineup includes surgical gowns, examination gloves and diagnostic equipment, as well as consumer-facing brands such as Curad bandages. It has some $17.5 billion in annual sales.

The brothers James and Jon Mills founded the company in 1966, taking it public in 1972 before buying back the shares five years later.

(WSJ)

It will be interesting to follow the future returns of these 2020/21 U.K. Private Equity purchases...

Private equity investors in search of a discount are targeting British public companies that have seen their valuations battered by Brexit and the pandemic.

PitchBook data shows that there have been 131 buyouts of publicly traded companies in the UK, totaling £25.7 billion (about $36.5 billion) in deal volume so far this year. In less than six months, that figure has surpassed last year's record total of £17.5 billion. Recent deals include pharmaceutical company Vectura, which has agreed to be acquired by The Carlyle Group in a £958 million deal, and infrastructure group John Laing, which KKR is planning to purchase for around £2 billion.

The impact of the pandemic and the UK's exit from the European Union have been blamed for the decline in valuations that, according to a March report by Fidelity International, has caused UK companies to trade at a roughly 40% discount to world stock markets.

Buying British

(Pitchbook)

Big news in power generation last week as Wyoming is picked for the first new nuclear technology plant...

TerraPower, Wyoming Gov. Mark Gordon and PacifiCorp today announced efforts to advance a Natrium™ reactor demonstration project at a retiring coal plant in Wyoming. The companies are evaluating several potential locations in the state.

“Together with PacifiCorp, we’re creating the energy grid of the future where advanced nuclear technologies provide good-paying jobs and clean energy for years to come,” said Chris Levesque, president and CEO of TerraPower. “The Natrium technology was designed to solve a challenge utilities face as they work to enhance grid reliability and stability while meeting decarbonization and emissions-reduction goals.”

“This project is an exciting economic opportunity for Wyoming. Siting a Natrium advanced reactor at a retiring Wyoming coal plant could ensure that a formerly productive coal generation site continues to produce reliable power for our customers,” said Gary Hoogeveen, president and CEO of Rocky Mountain Power, a division of PacifiCorp. “We are currently conducting joint due diligence to ensure this opportunity is cost-effective for our customers and a great fit for Wyoming and the communities we serve.”

The location of the Natrium demonstration plant is expected to be announced by the end of 2021. The demonstration project will be a fully functioning power plant and is intended to validate the design, construction and operational features of the Natrium technology...

The project features a 345 MW sodium-cooled fast reactor with a molten salt-based energy storage system. The storage technology can boost the system’s output to 500 MW of power for more than five and a half hours when needed, which is equivalent to the energy required to power around 400,000 homes. This innovative addition allows a Natrium plant to integrate seamlessly with renewable resources and could lead to faster, more cost-effective decarbonization of electricity generation. In addition, the technology’s novel architecture separates and simplifies major structures, reducing complexity, cost and construction schedule, while delivering safe and reliable electricity.

(TerraPower)

'Knives Out' at the PGA...

This looks like a new case for Benoit Blanc. There is a super genius among the PGA Pros who has convinced half of his competitors not to get the COVID vaccine. Gambling with your health is one thing, but if you are an unvaccinated professional golfer, it also steals from your life due to the daily time suck and rigors of testing that the PGA requires for those who haven't been jabbed.

Well, someone's clever plot finally paid off on Sunday as the clear leader of the field, Jon Rahm, left his first win of 2021 and $1.7M on the table by testing positive for COVID. So, who did it? Was it Patrick the winner of the Memorial yesterday? Or maybe Phil the Gambler using his playful nature to sweet talk the field? Possibly Tiger the Stanford grad has some alternative agenda to thin the herd? Or maybe the 'who done it' is just another pro angling for a spot on the Ryder Cup team in September? Could the big anti-vaccine, conspiracy talker in the clubhouse be fully vaccinated? Tell Daniel Craig to get that southern accent ready because the script for 'Knives Out Two' is coming together quickly.

Tweet from @ESPNStatsInfo

(ESPN)

Catch up on past Weekly Research Briefings >


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