This post will provide my updated thoughts on MoviePass, Helios (HMNY), and AMC (AMC). Before I jump in, if you haven’t read my first post, please do. I want the changes I’ve made to be very clear to everyone. You’ll see it in my writing going forward and it’s not going to change. It’s this way or no way — the new normal.
Before We Start. I just have to say – I LOVE the WordPress iPhone app. If they make a push to attract stock pickers to their platform, it could do to Seeking Alpha what Seeking Alpha did to the Yahoo chat boards. It’s smooth, functional, and has already introduced me to bloggers I didn’t know about.
I can also search blogs by company name and/or ticker symbol. At this point, there isn’t a lot of stock-related content, but it wouldn’t take much to change that. I think it’s worth checking out (for bloggers and readers alike). For me, it’s been great. In the first 24 hours, I received thousands of hits from 40 different countries.
Long-time readers should note some significant changes in how I communicate in the public domain. The sole purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses. Accordingly, this document should not be construed as an endorsement of the companies or securities discussed herein. The disclosure below is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
OK, let’s get to the MoviePass madness…
MoviePass Declares War On AMC! In my last post, I said that the major theaters were all benefiting from MoviePass. I also provided a framework for calculating the impact. However, I didn’t share my actual calculations within that framework.
But HMNY CEO Ted Farnsworth is here to help.
This morning, he went public with his calculations on the impact of MoviePass on AMC… and his figures are even greater than the ones I estimated.
This is going to be ugly/messy, but I don’t have time to make it look pretty…
What a wild turn of events today. Here’s the contents of a private email I sent to a research partner several days ago… and then some updated commentary.
From Private Email:
Got this from one of the smarter investors online…
- Average ticket price is around $9 ($8.93 per box office mojo)
- 1.2 Billion tickets sold
- 11 billion in ticket sales
- 2.4 Billion spent on Studio advertising
- Around 220 million unique moviegoers
- Average viewer sees 5.6 films per year
- Average concessions spent per person $4.28.
- AMC and Cinemark the largest remaining publicly-traded operators, gross about $4.8B and $3B (2 Billion at the box office and 1 Billion off concessions).
$11B tickets ($5B gross margins)
$5.5B concessions ($4.7B gross margins)
MP friend effect? Let’s say 10%.
MP average ticket price? Likely closer to $11 than $9, due to coastal concentration.
Based on Mitch’s most recent interview (as of Jan 16), they are increasing movie-going by about 2.4x… and we can assume the concession uplift is still around 120%.
MP is buying ~3M tickets per month and perhaps adding 0.3M more via the friend effect. That works out to over 2M INCREMENTAL visits for the cinemas (3M – (3M / 2.4) + 0.3M).
That’s $22M ($10M in additional gross profits) from ticket sales.
The concession impact is (2M * $4.28 * (1+120%)) = $18.8M
That’s about $15.5M in additional gross profits
Total impact = about $25.5M in gross profits, with about $24M of that dropping to the pre-tax line (about $19M to the bottom line) per MONTH.
That = $228M annually, with about 18% ($40M) accruing to CNK, based on their market share… and $66M to AMC.
That’s about $1.25 per share for AMC and $0.36 for CNK!
UPDATE (for this public post)
That $66M for AMC was after-tax. Pre-tax is more like $82M.
That number is so big, I had to re-calculate it multiple times with two of my closest Wall Street veterans to make sure it was right. They agreed.
But today, HMNY is saying that the number is even bigger (see below): $135M… excluding concessions?!!?! That seems crazy to me. However, the number might be in between, because MP might be providing a disproportionate amount of revenue to AMC (due to a continuing influx of subscribers, high first- and second-month usage, a higher concentration of AMC theaters on the coasts where MP is most popular right now, AMC’s higher per-ticket price especially on the coasts, and perhaps a higher friend effect than I factored). I don’t think that’s enough to validate Ted’s number, but it is enough to boost mine quite a bit (perhaps 50% — non-scientific number).
Either way, I feel more comfortable than ever that my $1.25 annualized EPS estimate is solid (if not low). That’s about 32-cents per quarter on a $12 stock. What’s crazy is that I’ve seen no indication that AMC’s Wall Street analysts knew about this, making it a material tailwind for Q4 earnings (which will be announced in 4 weeks). What’s also crazy is that it could all go POOF if MoviePass follows through on their threat to exclude AMC from the MoviePass service.
…but can they?
Sure… but when? Over 1.5 million customers have paid MoviePass for the right to go to AMC theaters (among others). Many of those are on monthly payment plans, so I think MP can change the terms to exclude AMC. However, those who bought 3-, 6-, or 12-month plans are entitled to their original terms until expiration… unless those terms entitled MoviePass to do this from the start (I need to look into that — does anyone out there already know offhand? Chime in! This is part of why I do this!).
In any case, what I told you all on Wednesday is now public knowledge. Frankly, I don’t think AMC should be down on the news. There are three scenarios to consider:
- AMC caves in and gives MP a piece. If so, they are still getting a bigger benefit than Wall Street has been discussing (which has been zero). However, it also exposes AMC to potentially helping MP become a much more powerful company (which could come back to bite AMC harder in the future).
- MoviePass caves in because of the negative public response. If this is found to be a bait and switch, the legal ramifications could be significant. Personally, I trust that Mitch knows what he’s doing here. He proved his ability to leverage lawyers during his days at Redbox. I think MoviePass can cut AMC off (at least eventually). Yes, they will lose customers and the ability to say “any theater, any time”, but the brand has already been built. I think the brand can survive the credibility hit… and I don’t think MP needs AMC’s 20% market share to be successful (though I still have my doubts regarding their ability to be successful). In any case, this scenario would be incredibly beneficial to AMC (just not likely in my opinion, the more I think about it).
- AMC doesn’t cave in and MoviePass cuts them off. In this scenario, AMC’s earnings go back to the way things were a few months ago (which hasn’t been seen in a big way via their in publicly-announced earnings — Q3 didn’t benefit that much, based on my calculations). However, they do start to lose some customers, as 1.5M+ MP subscribers start going elsewhere. Keep in mind, that’s not a big number now, because 1.5M represents less than 1% of moviegoers… but it’s only getting bigger.
SOME OTHER THOUGHTS…
- I’m bullish on HMNY buying movies (see the news from yesterday). If they choose good ones, they can really help those movies succeed (and benefit from doing so). Yes, they’d be paying for the movie tickets, but they’d also be controlling which theaters are showing the movie (presumably favoring ones that are paying MP a percent of revenue). Also, the biggest brunt would be felt in the first weekend. If they can create a strong first weekend for a good-but-unknown movie, the movie will rank high with high reviews and start doing well with the general public. I’ve learned that the first weekend is critical for the lifetime value of the movie, so I appreciate what they’re doing here.
- I also think they should consider acquiring smaller theaters instead of partnering. If they’re adding so much to the theaters’ bottom lines, why not get the full benefit by buying them cheaply and then building up their attendance / market share?
- The path for MoviePass to become a profitable entity is becoming clearer… and I’m still of the mind that it will happen as a company that impacts smaller movies and smaller theaters. That’s not a bad thing, but not the grand vision that some are hoping for. If my thinking is correct, the question is, “will that be enough to offset the significant investment that was required to get them there?”.
With all the debt and dilution, the earnings from being a niche player may not be enough to justify today’s valuation. Of course, if MoviePass grows into something that impacts a broader swath of theaters and movies, there’s certainly upside to be unlocked.
However, to do that, they have to crack the top 3 players. Winning 1,000 theaters is nice, but there are about 40,000 screens in the U.S. and the top 3 players own half of them…
What does all of this mean for the stocks involved? That’s not for me to say. I have no intention to sway investors’ opinions or actions. Investors must make their own decisions with their own advisers. This forum is meant to share my research and thoughts with the expressed intent to attract feedback (to assist in my personal investment decision-making process).
Disclosure: I hold no position in HMNY. However, I have a bullish stock and option positions in AMC, about half of which is a very short-term bet on the stock recovering at least some of today’s 4.5% losses. The rest of my position is meant for capital appreciation on the strength of the profits MoviePass is bringing to AMC, but that trade is subject to change or reversal at any time, since this situation is so fluid / dynamic. I don’t encourage or recommend that anyone follow suit, since I may exit the entire position at any time without notice.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article.
The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Similarly, the disclosure above may state that I am long or short shares of the companies mentioned herein, but should not be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. That disclosure is true as of the time the article is placed in queue for publication, but it is possible (or even likely) that I might be buying and/or selling the stocks mentioned herein immediately thereafter or at any other time, regardless of (and possibly contrary to) the content of this article or this website’s timing of its release. The disclosure will not be updated following submission of the article and may be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. I wrote this article myself and I receive no compensation for writing it. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.