Why Dalian Wanda, National CineMedia Led Barclays To Downgrade AMC Entertainment

With AMC Entertainment Holdings Inc AMC underperforming the market by 42 percent year-to-date, Barclays is taking responsibility for its lack of foresight calling it “one of our worst calls to date."

The reason for the underperformance?

Barclays analyst Kannan Venkateshwar attributes it to "underestimation of idiosyncratic risk factors":

• The decline In National CineMedia, Inc NCMI shares, which are down 49 percent year-to-date despite gaining eight percent Wednesday. AMC had to divest its asset in National CineMedia in a short timeframe as a part of the Carmike merger.
• News that Chinese government has blocked banks from funding AMC’s parent company, Chinese real estate conglomerate Dalian Wanda.

AMC could see upside from its recent M&A activity, but “execution risk is not trivial, especially now that the company’s capacity to invest is likely to be more constrained and CEO Adam Aron is still relatively new to the industry,” said Venkateshwar.

What was once a relatively clean story until last year has become much more muddied, according to Barclays. While AMC appears to have limited downside at present levels given its drop, upside will depend on multiple expansion with very few positive catalysts.

As a result, Barclays downgraded AMC from Overweight to Equal-Weight and lowered its price target from $31 to $25.

“While downgrading a stock when it is down significantly is not our preferred course, it is tough for us to defend the stock when the company itself does not have much visibility on recent developments in China.”

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