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AMC Foolishness Comes at a Dear Cost

“For one thing, in a world of free money, there’s almost no penalty for being a numbskull. And no reward for prudence. You run your business at a loss? No problem. Just borrow whatever you need.”  -Bill Bonner

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AMC Foolishness Comes At A Dear Cost
“For one thing, in a world of free money, there’s almost no penalty for being a numbskull. And no reward for prudence. You run your business at a loss? No problem. Just borrow whatever you need.”  –Bill Bonner
In Undermining Capitalism with Unreal Values and Crass Distortion we discuss how recent extreme monetary policy measure undermine capitalism. The article highlights how yield hungry speculators are piling into junk-rated debt despite the fact they all but guaranteed to lose purchasing power. Our gripe goes well beyond the mispricing of financial markets. Its more insidious. Warped market values reduce the productive output of the economy, and therefore impair wealth and income equality. Misallocated capital is inflating the value of meme stocks, such as the near-bankrupt AMC movie chain, and draining resources from productive sectors of the economy.

Bad News Is Not Good News

The Wall Street Journal recently published- Explaining ‘Bad News for the Economy Is Good News for the Stock Market’. We can sum it up in one sentence: bad economic news is good news for share prices because it ensures the Fed will provide stimulus for longer. In a robust economy, with the promotion of productivity as its centerpiece, investors should greatly favor good economic news. Conversely, in a market fueled by excessive speculation, bad news and the accompanying liquidity from the Fed trump economic reality. The juxtaposition of their preferences define the type of market the Fed is fostering.

March Of The Zombies

In properly functioning markets investors aim to buy assets with promising growth potential. Further, they should generally shun investments with limited or no growth potential. Such a capitalistic process allows new companies with productive ideas to raise capital. At the same time, it limits capital flows to companies with unproductive assets and little potential. This dynamic ensures productivity growth. We can think of the self-serving process as capitalistic Darwinism, or as well call it, the Virtuous Cycle.

When a central bank recklessly manipulates interest rates, the process fails. In such circumstances capital tends to gravitate toward speculative investments. The fittest, or those offering the economy the most productive benefits, do not receive the lions share of capital. Quite often, so-called zombie companies take capital from them. Zombies are companies which were bailed out and/or cannot meet their debt payments without issuing more debt. Such companies not only stay alive but often thrive when rates are too low and speculation runs rampant. Most zombie companies do not offer promising growth or innovation. Instead, they prey on investors with the allure of higher stock prices. The graph below shows the strong correlation between the number of zombie companies and the level of real yields. The next graph shows zombie company stocks returned nearly 3x the S&P 500 since January 2020. Not bad, considering the severe recession severely hampered many of their earnings. Along the same lines, the Goldman Sachs non-profitable Technology Index, which is not 100% zombie companies, but includes many, has killed it, for lack of a better word.

AMC- The Walking Dead

To better understand zombie corporations, lets dissect a living and thriving zombie. AMC Entertainment Holdings, AMC, is America’s largest movie theater chain. They have been around for 101 years. Let’s compare the quantitative definition of a zombie and see how AMC stacks up.
  • Income is not sufficient to meet debt payments. As shown below, AMC’s income exceeded its interest expense only once in the last 10 years.
  • An Altman score of less than 1.8 suggests a company might be heading toward bankruptcy. This score uses five common business ratios to help predict bankruptcy odds. As shown, AMC’s Altman Z-score has not been close to 1.8 in the last five years.
AMC easily qualifies as a zombie.
 

Pandemic Effects

As shown above AMC was a walking zombie before the pandemic. Not surprisingly, AMC struggled through the pandemic. Its revenues have shrunk to less than 10% of their pre-pandemic levels. More concerning, despite vaccinations, movie goers are not returning to the movies as they were. While there remains apprehension about going to theaters, AMC is also a victim of streaming. During the pandemic, services like Netflix, HBO, Hulu and others became a more viable movie watching option. To add insult to injury most movies are now simultaneously introduced at the theater and via home streaming services. Based on data from The Numbers, the situation is dire for movie theaters. For example, the current hit Black Widow’s has brought in about $167 million in box office revenue. In 2019, for comparison, Avengers: Endgame hit $357 million in its best weekend. The graph below shows how movie ticket sales are only slowly rebounding.

AMC Is Not Dead

While we paint a grim picture of AMC, it is not dead. The movie producers need the theaters and will keep them alive. This is evident in their support for AMC and other theaters. For example, AMC now receives some of the streaming profits from movie studios. Per CNBC- “What we learned during the pandemic is that it is not easy to replace all that lost theatrical window revenue,” said Eric Handler, media and entertainment analyst at MKM Partners. “That feeds a lot of downstream revenue opportunities. There will be changes to the model, but I still think theatrical is something that will remain.” From a macroeconomic perspective, we are irrelevant whether AMC survives or goes bankrupt. What we are concerned about is how much capital is being misallocated to AMC.

Gross Misallocation

The graph below shows that AMC’s market cap or valuation has recently fallen from $25 billion to $18 billion. Currently, at $18 billion its market cap is about six times its pre-pandemic level. Given the pandemic related losses and new habits of movie viewers, should the market cap be higher than it was in prior years? NO! It doesn’t matter what we think. AMC has become a popular meme stock and investors seem willing to use their precious capital to chase it well above prior valuations. Speculators do not consider AMC’s balance sheet, income statement, or prospects. Instead, they solely focus on whether it will go up or not. What if the $18 billion of capital was instead allocated toward something productive? Imagine if AMC investors focused on cancer research, space exploration, nano technologies, or other productive ventures. Now consider it’s not just AMC. Zombies are all over the place and sucking up capital that could be used to more productive means.

China Gets The Joke

Rampant speculation has negative economic and sociological impacts. Maybe of equal importance our chief economic antagonist appears to be taking a different stance by encouraging productive investment at the expense of non-productive ventures. Noah Smith, blogger and Bloomberg Opinion author, recently wrote Why is China Smashing its Tech Industry. He believes the recent punishment of “tech” companies such as Alibaba, Ant Financial, Tencent, and Didi are not based on the same monopolistic concerns brewing in the United States. Noah thinks there is much more to the story. Per his article: “And so when China’s leaders look at what kind of technologies they want the country’s engineers and entrepreneurs to be spending their effort on, they probably don’t want them spending that effort on stuff that’s just for fun and convenience. They probably took a look at their consumer internet sector and decided that the link between that sector and geopolitical power had simply become too tenuous to keep throwing capital and high-skilled labor at it. And so, in classic CCP fashion, it was time to smash.” Noah argues China is promoting productivity growth, not profit growth. If true, China is playing the long game which will benefit their nation. While banning or even punishing ‘internet” companies is much less likely here, we should take notice.

Summary

The Fed does not directly promote AMC, yet its actions create an environment that allows AMC shares to sop up precious capital despite uncompelling valuations. This capital is therefore not available for more productive investments. It may be fun watching and/or trading zombie companies, but the cost of such entertainment is more costly than most people grasp.
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Colgate-Palmolive Stock Gets Squeaky-Clean Appraisal

Home goods maker Colgate-Palmolive (CL) got a boost on Sunday, as Deutsche Bank offered some positive commentary on the stock. The shift makes Colgate-Palmolive just a little more attractive. The
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Home goods maker Colgate-Palmolive (CL) got a boost on Sunday, as Deutsche Bank offered some positive commentary on the stock.

The shift makes Colgate-Palmolive just a little more attractive. The combination of past performance, and a surprising extra feature, leaves me fairly bullish on Colgate-Palmolive overall.

Colgate-Palmolive's year has been fairly moderate so far. For most of the year, Colgate-Palmolive's share price has remained in a tight range between $76 and $84.

There have been a few breakouts above $84, but these seldom lasted long. One pronounced dip back in late February/early March kept the price below $76 for a while, but even here, it never got much lower than $74 for a closing price. (See Colgate-Palmolive stock charts on TipRanks)

Deutsche Bank analysts noted that many of Colgate-Palmolive's troubles are already priced into the stock. This is particularly true for inflation, an increasing concern worldwide.

Most investors, analysts noted, are focused tightly on issues of costs for companies like Colgate-Palmolive. Perhaps too tightly, Deutsche Bank's Steve Powers noted. Powers additionally noted that the improved focus on growth at Colgate-Palmolive isn't as appreciated as it should be.

Thus, Deutsche Bank not only hiked its recommendation (to a Buy from a Hold), but also its price target, going from $84 per share to $86 per share.

Wall Street's Take

Wall Street consensus analysis calls Colgate-Palmolive a Hold. This assessment has changed several times in the last year. As recently as September 2, Colgate-Palmolive was considered a Moderate Buy, which changed from being a Hold back on April 1.

Out of the nine analysts giving 12-month price targets on Colgate-Palmolive in the last three months, two consider the company a Buy, while seven call it a Hold.

The average Colgate-Palmolive price target is in a very narrow range. The current average price target is $88, which represents upside potential of 14.9%.

An Unexpected Income Champ

The overwhelming majority of analysts right now call Colgate-Palmolive a Hold, and with good reason.

Looking for Colgate-Palmolive to be a winner among growth stocks is about like looking for a rock to win the Kentucky Derby. The past year shows minimal movement in the company's share price overall. That's not great for anyone looking for growth value. For those looking for a safe, secure income stock, however, Colgate-Palmolive may be a winner.

A look at Colgate-Palmolive's dividend history shows an exciting upward trend. The company has raised its dividend every year for the last five years, and then some. Never by very much, granted.

Considering that we just went through a pandemic, a company that's hiking its dividend, even by cents per share, is a welcome sight.

Concluding Views

There's no doubt Colgate-Palmolive benefited from the pandemic, and the stock-up frenzy that followed. There's also no doubt that that benefit is gone now, as most of the world re-opens. Yet the need for soaps, toothpaste, and the like will never truly go away.

This consistent demand should make Colgate-Palmolive stock an attractive prospect for some time to come. Its regular — and regularly raised — dividend only sweetens an already attractive pot.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

The post Colgate-Palmolive Stock Gets Squeaky-Clean Appraisal appeared first on TipRanks Financial Blog.

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Zoom-ing in on the Strengths and Threats of Zoom

Shares of video-communications provider Zoom (ZM) have plunged around 20% since it released its second-quarter fiscal 2022 results on August 30, pulling down the valuation of its impending all-stock acquisition
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Shares of video-communications provider Zoom (ZM) have plunged around 20% since it released its second-quarter fiscal 2022 results on August 30, pulling down the valuation of its impending all-stock acquisition of Five9.

Putting it into context, Zoom had inked a definitive acquisition agreement with Five9 back in July this year. Five9’s software products for contact centers, such as workforce management, speech recognition, predictive dialer, etc., are offered through a virtual contact center cloud platform, enabling inbound and outbound customer interactions in a single platform.

The deal is expected to close in the first half of calendar year 2022, helping Zoom penetrate the $24 billion global contact center market. If the acquisition materializes, Five9’s CCaaS (contact center as a service) solution will be integrated with Zoom’s broad communications platform.

However, the acquisition has a few hurdles to overcome, due to which I have a neutral stance on the stock. Needham analyst Ryan Koontz, who has been closely following Zoom’s developments for the past few weeks, identified a few key possibilities that can dampen the company’s growth efforts in the near future, and some upsides that may mitigate those risks.

For starters, the majority of Five9 shareholders are not too happy with the deal, and may either straight-out vote against the acquisition later this month, or make more demands. However, Koontz sees a possibility that Zoom might offer Five9 shareholders a mix of stock and cash worth around the original implied value of $200 per share. This might turn around the negative investor sentiment.

Koontz believes Five9 to be the only pure-play enterprise CCaaS company in the world, and its acquisition intention demonstrates that Zoom is looking at acquiring “adjacent-product, growth companies with well-established enterprise channels."

Again, although Zoom has displayed excellent efficiency and execution during the pandemic, one trend concerns the analyst. Koontz stated, “We are concerned that the growth at the low end, namely pro-sumer and small business customers, outpaced the expansion of the company's mid-market and enterprise business.” This low-end of the market typically sees a high level of customer churn, and may pose as a headwind before Zoom can grow its Events and Platform sales.

“We choose to wait for better insights into post-pandemic and new product trends before getting more constructive on the stock,” explained Koontz, maintaining his Hold rating on the stock.

Koontz notes that there is a likelihood of Zoom shifting its focus from the contact center to its new Events strategy. He believes that the company can achieve scale in this area by taking the path of strategic acquisitions.

“We view the events industry as highly complex and a key area where Zoom could benefit from acquiring complementary, non-video centric products, staff, and industry know-how to more quickly establish the deep ecosystem required for enterprise-scale events,” he said, pointing at the announcement of a possible investment in event marketing and management company Cvent.

Notably, Koontz looks at Cvent as a more favorable acquisition candidate for Zoom, as against virtual events companies Kaltura (KLTR) or On24 (ONTF), which are not as advanced in enterprise channel development as Cvent.

The consensus rating for Zoom is a Moderate Buy, based on 10 Buys and 8 Holds. The average Zoom price target of $375.85 indicates an upside potential of 35.08%.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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Intel Stock: Deep Value Hidden in Plain Sight?

It’s been a gruelling past few years for Intel (INTC) stock, which really lost a step to the competition. Playing a game of catch-up in the technology industry, or not
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It's been a gruelling past few years for Intel (INTC) stock, which really lost a step to the competition.

Playing a game of catch-up in the technology industry, or not being on the absolute cutting-edge, may not be the best place to be as an investor. It is worth noting, however, that Intel stock has modest expectations priced in, with a relatively low bar ahead of it.

Intel has made moves to keep the company moving forward amid continued COVID-19 pressures. Still, I'm inclined to remain neutral on shares, as the competitive landscape looks quite harsh. (See INTC stock charts on TipRanks)

Competitive pressures could really pick up over the coming years, as AMD (AMD) continues to gain momentum, while other tech giants, such as Apple (AAPL), opt to ditch Intel CPUs to build their own.

Undoubtedly, the main reason to scoop up Intel is for its dirt-cheap multiple. A depressed price-to-earnings multiple (Intel shares trade at 12.1 times trailing earnings) doesn't mean much if there's no ambitious game plan, or a competent management team to pull off such a plan, though.

Fortunately, new Intel CEO Patrick Gelsinger may have what it takes to get Intel back to the cutting edge.

Intel's Plan

After fluctuating for years around a fairly wide channel of consolidation, Intel needs a spark.

The company has a roadmap that could bring the company back to the top as soon as 2025. In late July, Intel shed more light on its plans. It included some pretty eyebrow-raising innovations. Even if Intel can't re-gain the lead in four years, it can still close the gap in a big way.

When it comes to CPUs, it seems like a race to the bottom in terms of the nanometer process. With Apple's 5nm M1 chips already on the market, Intel's 10nm chips don't look too hot.

However, such numbers don't tell the whole story. Intel's 10nm chips still hold up well against AMD's 7nm chips.

Wall Street's Take

According to TipRanks’ consensus analyst rating, INTC stock comes in as a Hold. Out of 26 analyst ratings, there are nine Buys, 10 Holds, and seven Sells.

The average INTC price target is $61.14. Analyst price targets range from a low of $40 per share, to a high of $85 per share.

Bottom Line

With a 2.6% dividend yield, Intel is one of those contrarian value stocks that will reward investors for their patience.

With a compelling roadmap, there is a pathway for Intel to get back to where it was: a dominant behemoth in the hardware space.

Whether management can push Intel to walk that path is another question entirely.

Disclosure: Joey Frenette owned shares of Apple at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

The post Intel Stock: Deep Value Hidden in Plain Sight? appeared first on TipRanks Financial Blog.

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