Abstract
Performing the comprehensive analysis of the financial situation of AMC Entertainments, we have gained an optimistic review for the entity. Strong profitability driven by revenue growth and controlled cost structure will enlarge the podium of success for the company. On the other hand, high amount of operating cash flow growth, and a prudent spending on capital assets and dividend payment, indicates a sustainable approach of the company for maintaining balance throughout. Similarly, a sustainable proportion of debt-equity is apt according to the recent financial strength of the company and do not spark any source of concern.
However, two issues that came up during the analysis part was the poor liquidity run and pessimistic valuation results, that do raise the need to be meticulous before channelizing the funds in the company. Important to note, our liquidity analysis reveals an uncontrollable increase in the current liabilities relative to the current assets, however, with operating cash flow able to cover approximately 65% of the total current liabilities of the company,our concern was duly relieved, but still, the company needs to have a check on the exponential growth in current liabilities. On the other hand, stock valuation on the residual income basis and using the projected net income revealed that the stock is highly overvalued, however, since the valuation model is highly subjective, we are not so concerned and base our final review on the outcome of the financial analysis that confirms that the company is going through a bullish period and do deserves an inclusion in the stock portfolio.
As the final instalment to this research paper analyzing AMC Entertainment Holdings, we will now prepare a pro forma income statement for the next year using current income statement. While the assumptions used for the income statement will be discussed comprehensively in the upcoming section, we would also like to state that we will use the pro forma income statement and some other financial items to perform valuation for the stock using residual income approach.
Pro-forma Income Statement
In this section, we have prepared a pro forma income statement of AMC Entertainment Holdings for the year 2016 under the following assumptions:
-Revenue Growth:
We have assumed that the revenue figures of the company will grow by 10% during 2016. Accordingly, the revenue figure for 2016 were projected at $3241.7 million.
-Other items
All the other items of the income statement were assumed to grow in proportion to the revenue figures. This includes, cost of goods sold and operating expenses, however, other items such as interest expense and other non-operating income are not assumed to be in proportion to the revenue figures and assure held constant for 2016.
Highlighted below is the projected income statement for AMC Entertainment for the year 2016:
Stock Valuation:
Before concluding the final report, we hereby perform the stock valuation using residual income approach. As part of this approach, we will use the projected net income for the year 2016, and will use beginning book value of equity while the cost of equity will be calculated using the CAPM Method:
Cost of Equity: Risk free rate+ Beta (Equity Risk Premium)= 1.81+ 0.75(6)
= 6.31%
Here:
Risk Free Rate= 10-year US Treasury Yield
Beta: Volatility of stock returns to the market index
Equity Risk Premium: Excess of market return over risk free rate
Beginning Book Value of Equity per share: $15.89/share
Projected Net Income per share: 119.04/21.47
= $5.54/share
Residual Income per share: Net Income per share- (Cost of equity * Beginning book value of equity)
= 5.54-(0.0631* 15.89)
= $4.53/share
Current share price:$27.59
Result: Overvalued
Conclusion
When ratios are used, the analysis of data becomes more credible and authentic. Audited financial statements provide maximum authenticity of transparency and performance. Following the outcome of the financial analysis of AMC Entertainment, it is confirmed that the company is going through a bullish financial period with strong profitability and cash flow position, and with growth driven by sustainable factors such as revenue growth and controlled operating expenses. Moreover, the company is also spending handsome amount on capital assets and is thus maintaining a good balance overall.
However, the outcome of liquidity analysis was worrisome and the company needs to integrate efforts and improve the metrics,especially with the current liabilities. Moreover, following the residual income approach, we have found that the stock is relatively overvalued and thus, investors should refrain from the stock. However, relying on one valuation model is not appropriate and that too when we depend on subjective assumptions relating to the projected income statement.
At the end, we strongly believe that the stock is going strong and deserves a buy recommendation. Our analysis also aligns with the market analysts following the stock.
References
Analyst Opinion: AMC Entertainment. (n.d.). Retrieved July 11, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/ao?s=AMC
CNBC. (n.d.). US 10 year treasury yield. Retrieved July 11, 2016, from http://data.cnbc.com/quotes/US10Y
Damodaran, A. (2015). Market Risk Premium. Retrieved July 11, 2016, from http://pages.stern.nyu.edu/~adamodar/
Key Statistics: AMC Entertainment. (n.d.). Retrieved July 11, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/ks?s=AMC
