As The Walking Dead and Better Call Saul are now over and AMC Networks (AMCX, Financial) looks for new hit shows, there may be a significant decrease in viewership in the short term. That said, it is uncertain how this will affect the revenue and income for the company as the brand continues to offer some of the best content across television and film.
AMC Networks (not to be confused with floundering movie theater giant AMC Entertainment (AMC, Financial)) is an impressively expansive global entertainment company that owns and operates a number of cable television networks, including AMC, BBC America, IFC, SundanceTV and WEtv. It went public in 2011 and has never seen price levels this low, until recently. However, in the last decade, the company has grown from $1.3 billion in revenue to more than $3 billion, earning a total of $3.1 billion after taxes. The fact that it now trades at an enterprise value of $2.8 billion (a capitalization of just $660 million) is baffling to say the least.
History of success
In case you're not familiar, AMC Networks was founded in 1980 as American Movie Classics, a cable network that aired classic Hollywood films. In 2002, the company changed its name to AMC Networks and began expanding its programming to include original content, such as the critically acclaimed drama "Mad Men" and the popular zombie series "The Walking Dead."
AMC Networks has turned itself from a minor cable channel into a prestigious platform for original scripted content. This has given the company growth potential, but it does depend on AMC's ability to create and produce strong original content, as well as generate revenue from its programs internationally and on streaming platforms. More recently, the company has been successful in monetizing programs like "Better Call Saul" on third-party streaming platforms, but the launch of AMC+ potentially decreases the price of future streaming rights if they are no longer exclusive.
AMC has plenty of attention
AMC Networks operates five domestic cable channels and a portfolio of international channels that reach over 350 million subscribers in more than 125 countries. Its main channel, AMC, is often ranked in the top 25 cable networks in the United States, while WEtv is just outside the top 25. None of the company's other channels fall within the top 25; however, its IFC segment reaches 68 million households and AMC has increased its international presence through the acquisition of Chellomedia, which has raised the percentage of revenue earned from outside the United States to 20%.
The value of video content continues to rise as distribution markets evolve. Despite shifts in consumption habits, over 60% of households in the United States still have pay-TV subscriptions. Even those who have "cut the cord" and no longer have a pay-TV subscription still consume video content through other means. Netflix (NFLX, Financial), Amazon (AMZN, Financial) and Disney (DIS, Financial), as well as numerous other over-the-top (OTT) services, rely on a large library of content to attract and retain subscribers. The creation of high-quality content for cable networks is not a finite resource, as good content will always have an audience.
AMC has stellar programming
AMC Networks has built a strong reputation for producing high-quality programming at a profit even as it continues to innovate and expand its offerings to meet the changing needs of its viewers. The number one goal is to create popular new shows.
Despite the drop in market value and short term management challenges, AMC Networks is expected to benefit from the increasing demand for its digital and advanced advertising offerings, as well as its content creation capabilities and significant investments in its streaming business.
The next hit series could mean capturing higher rates on advertising or even more subscribers to its monthly service AMC+, plain and simple. And, while the market is getting crowded in streaming, people still want to watch AMC.
In fact, the company said in the last quarter it gained approximately 300,000 streaming subscribers, bringing the total subscriber count to 11.1 million paying $7+ per month. That’s a billion dollars right there and represents a 44% year-over-year increase in subscribers, demonstrating the strength of the company's transition and its ability to rapidly expand its reach.
AMC's valuation is incredibly tempting
In terms of financial performance, AMC Networks has seen steady growth in recent years. In the last 12 months, the company reported revenue of $2.94 billion and net income of $$289 million. It also has a book value of $23.33 per share and earns an incredible 25% return on equity. The company has total cash in excess of $790 million and total debt of $2.98 billion, which is not ideal but far from detrimental. The price-earnings ratio is incredibly low at just 2.34.
For investors, this means there are multiple ways to win - multiple expansion seemingly the most apparent. I see no reason for AMC to be traded at these levels, even if viewership drops off a cliff. At these levels, AMC Networks is a takeover target as well with any number of private equity firms likely looking at this, or even a big media company like Disney, which already shows AMC shows on Hulu.
Bottom line: Investors are getting a company that trades for less than three times net earnings, which have been consistently growing for the past decade, while getting a library of content worth more than the entire market capitalization for free and an audience eager for what’s next. All of this lines up for long-term return potential that seems likely to beat the market.
