The pay TV industry is one of the toughest businesses, with some of the highest entry barriers worldwide. AMC Networks Inc. (AMCX) is one of the few cable networks that managed to upgrade its status and reputation, and turn into one of the most popular television content producers and distributors in the United States.
Laying the Canvas
Originally spun off from Cablevision, this firm has built a net of several cable channels, in order to diversify revenue income. Its flagship channel, AMC, not only reels in half of the company’s revenue, but also reaches over 96 million pay TV households. But AMC is not all this firm has to offer in terms of entertainment: We TV is a network specifically for the female audience, reaching 77 million households and IFC broadcasts independent films and sitcoms. The niche network Sundance, on the other hand, appeals to pay TV customers with its premium movie channel package.
In 2007, after striking a deal with Lions Gate Entertainment Corp. (LGF) for the hit series “Mad Men”, AMC Networks landed its first breakthrough, establishing the company as a real competitor in the Pay TV industry. The strong shift from showing movie reruns to original programming, is only one of the firm’s strategies to attract a broader audience. And despite being less diversified than its peers Time Warner Inc. (TWX) or Twenty-First Century Fox Inc. (FOX), this company has shown real growth potential over the past seven years.
Expansion Is the Key
AMC Networks’ programming strategy is promising, but a lack of high budgets for content creation could be a problem for a company facing stiff competition. Staggering audience growth will give the firm power to increase affiliate fees, and also provoke a rise in advertising dollars. This will allow the company to reinvest in original programming and also contribute to elevating shareholders’ return on invested capital. Nevertheless, this dual revenue stream could be cut short in the case of a general economic slowdown, as advertising comprises one third of the company’s sales.
Following a desire to expand its viewership, AMC Networks recently acquired international cable channel business Chellomedia, from Liberty Global Plc (LBTYA), for little over $1 billion. The Chellomedia channels, meant to serve as an international platform for future programming, currently reach over 390 million households worldwide and will surely be beneficial to the firm in terms of audience gain. But the newly acquired debt load might also cut into the firm’s financial flexibility. In the past 12 months, for example, AMC Networks managed to boost a ROIC of 85.70% to an astounding 511.80%, while maintaining a 26.80% operating margin trailing 12 months. But such promising metrics may not be sustainable in the long term. Also, the level of profitability resulting from this new business still remains uncertain for the time being.
Uncertainty All Around
After looking at AMC Network’s groundwork in terms of sales, profits and strategies, I still find it difficult to say whether or not I feel bullish about this entertainment firm. Although its award-winning shows have been successful in creating a loyal fan base over the years, and higher affiliate fees add on revenue, there is still room for doubt regarding this company’s future. Especially when it comes to market competition, I believe this firm will struggle to grow outside the U.S., a segment where industry peers are further established. Additionally, while currently trading at 17.7 times its trailing earnings, share are selling at values similar to the industry’s average, but this price might fall as 2014 progresses. And if I were to follow the course of action of investment gurus Joel Greenblatt (Trades, Portfolio) and John Keeley (Trades, Portfolio), I too would be selling out my shares in AMC Networks.
Victor Selva holds no position in any stocks mentioned.