Last August, I called for AMC Networks (AMCX, Financial) to double by 2021. Nothing has changed. Investors who haven’t been building a position in the stock over the last year can still get in at the same price. Since last year, the stock has gone down to the mid-$40s, back up to the mid-$60s, and has settled just above $60.
The stock is clearly undervalued. While the company has almost doubled its sales and profit over the last five years, it now trades below its historical price multiples across the board. It’s an incredible business, generating north of $500 million in net income on just $72 million in capital spending.
AMC has the shows and ratings to continue increasing its affiliate fees, while decreasing its reliance on the more volatile advertising revenue stream through its Premiere monthly channel. Of course, ads still pay well when you have eyeballs watching. Pay-TV has been resilient as the hype surrounding cord-cutting has been overblown, mostly because stand-alone internet packages are not that cheap as combined deals are with many providers.
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AMC Networks content is spread out across five main channels that reach more than 90 million households in the U.S. and over 390 million subscribers in 130 countries. The company is set to deliver strong financial results in 2018. As long as it can continue to deliver excellent content to viewers, it will garner more and more attention and ad dollars.
Over the next two years, AMC expects to earn more than $17 a share, putting its earnings per share at $9.25 in 2019 and its book value north of $20. If traders revalue the multiple, the price could easily be in the $120s by then.
Not everyone believes this can be achieved, as is evidenced by the elevated number of short-sellers in the stock; it has 21.4% of float shorted as of June. Anyone can create content, but to do so at the scale and quality of AMC requires a large amount of cash and influence. And, with its new Premiere channel offering ad-free programming for $4.99 a month, cord cutters to get it at a lower price than HBO, Showtime or Starz.
Everyone is competing for viewership. AMC's direct competitors own large studios that can produce shows for their own networks or other networks, but AMC can get to that point over time. It’s also not a guarantee that competitors are more likely to be approached first by show creators. Larger cable networks like FX and TNT have noticed the success of AMC and have deeper pockets capable of investing in similar programming, but so far AMC has done it better.
The Dolan family, led by Charles Dolan (who is 91 years old), effectively controls the company with 66% of the voting power despite only owning 17% of the economic interest. By owning 100% of the Class B shares, the Dolans retain the right to elect 75% of the board of directors, and each Class B vote is worth 10 Class A share votes.
Given the family’s history with Cablevision, founded in 1973, the biggest risk is that business decisions would be made to specifically benefit the Dolans rather than shareholders, which became more of a concern when $2.4 billion of debt was placed on AMC during the Cablevision spin-off.
Even with the enterprise value above $6 billion, the revenue and profit growth should make investors at this price more than happy long term.
Disclosure: I am not long/short AMC.
