AMC Networks Is Good for a Double

An ad-free premium access option is being beta tested

Author's Avatar
Aug 31, 2017
Article's Main Image

AMC Networks Inc. (AMCX, Financial) was founded in 1980, is headquartered in New York and owns AMC, WEtv, BBC AMERICA, IFC and SundanceTV. Home of critically acclaimed television shows like "The Walking Dead," "Breaking Bad" and "Mad Men," AMC Networks can continue to grow for a long time, barring a major misstep.

There’s an entire roster of guru investors in AMC Networks but nothing over 2% of AUM with Leon Cooperman (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) having the largest positions.

There are a few things working in its favor financially. One, the company is likely to earn $7 per share by the end of next year, which based on today’s earnings multiple (13x) would put the stock at $91.50. Two, the company will continue buying back shares, and at this price it’s a smart move while the content it has produced still generates very solid viewership. Three, AMC Networks has great profit margins and return on capital, yet the price multiple is lower than both the company’s own historic average, the industry average and the Standard & Poor's 500. Expand that 5 or 6 points and you have a $133 stock on $7 in earnings.

It's no secret that growth is slowing this year. Yet, AMC Networks is the undisputed leader with five of the top 10 shows on cable TV across its key age demographics (adults 18 to 54). While viewership has been falling off for its cash cow "The Walking Dead," the series still remains a massive success. Every cable TV channel would be happy to have the audience and ratings TWD gets on a weekly basis. That audience drives high advertising revenue and capital that AMC invests in new replacement shows. In its second-quarter earnings call AMC management was very bullish as a whole, citing "high single-digit increases in CPMs at the top of the market," which obviously includes TWD.

Comcast and AMC are currently beta testing an ad-free premium access option called the AMC Premiere service, which would add $5 to your monthly bill for commercial-free viewing of current content, plus exclusive footage from some shows, sneak peaks, and “other bonus features.” This could be worth it for those who watch the show in real time. Of course, if 17 million viewers were paying $5 per month to not see ads during "The Walking Dead," those ads would get a lot cheaper. It’s a double-edged sword on this one but necessary to find the market for both: people who don’t mind ads and people who hate them. Some nights on TWD, I’ve taped ads in the vicinity of 25 minutes worth of content. An episode is only 60 to 70 minutes long.

This is a good company. It has a fairly significant moat, and it has plenty of ways to drive sales and earnings, which are expected to increase by nearly 10% per year through the rest of this decade. So, by 2021 (four years away, folks) the earnings could be above $10 per share. Even without multiple expansion, which I think may happen, the stock would be $130. At $61, it’s priced for an easy double.

Disclosure: I am not long/short AMC Networks.