An update to a compelling emerging growth story in a strong global media and content market
This report is a quick follow-up summary to my first report on Seeking Alpha: 'Breaking Bad' And Making 'The Killing' With AMC Networks. I initiated coverage of AMC Networks (AMCX) on August 31st. The first article provides comprehensive coverage of AMCX, a stock that I noticed on the daily ticket symbol banner as appreciating in price for several months. It turns out that I had not heard of this company, and I should have put 2 and 2 together on the name, as I am a regular fan of several of its original content programming, and have been since 2009.
Already familiar with the programming, as well as the increasingly compelling and expanding offerings, a closer look at it and due diligence reinforced a positive a bullish view on the company and its favorable growth prospects. AMCX is a spin-off from Cablevision (CVC), and IPO'd as a stand-alone public entity in June 2011.
A strong executive and management team was embedded, bringing two decades of experience within the former powerhouse CVC itself, and is still in place. In this report, I will update readers and investors as to the Q2 2013 results, growth trends, financial performance and balance sheet, product pipeline, and my bullish outlook. As stated previously, I initially concluded with strong conviction in the name and also suggested a strategy of entry points and an allocation of investing in the company.
As I wrote:
"I believe AMCX has upside potential for a positive 30-35% share appreciation by year end 2013, and can double in a three year period. Using the "Rule of 72," by dividing 72 by three (the three year period), indicates a 24% annual growth rate (CAGR) by my growth estimates. Pullbacks of 10% or greater, barring fundamental deterioration in the company, would be a gift and should be bought on weakness."
I added a recommendation:
"With all the upside potential in AMCX, I've resigned to buying 10-15% next week sometime (before earnings), and see if news of any kind can cause a further drop. If not, I'll wait until after the August 8th earnings report, listen to the conference call, and go from there. As an investor, I want to get to know the management, and listening to them is the best way (short of a personal meeting). For those readers that look at the 10-K and 10-Q reports and other SEC filings, but do not listen to the available online webcasts, I highly recommend that they do."
An initial price for a strategic entry point on July 26th was included:
"The 52-week high is $70.65, hit as recently as May 09th, and the respective low was $37.47. Currently, AMCX closed on Friday, July 26th at $67.89. Trailing twelve month (TTM) earnings per share were $2.14. AMCX does not distribute dividends at the present."
I recommended waiting for a pullback from $67.89, with the hope that shares would sell down to a $64-65 range due to any overall market turmoil, or prior to the August 08 Q2 earnings release. I hedged this entry by suggesting a possible allocation of 10-15% in that range prior to the earnings results. That target range was never reached, and I believe shares only sold down by 19c, even with this week's three down days prior to Thursday, August 8th: AMCX Open Price $72.04 Day Range $66.34-72.46 Close $66.90 (5.97%).
I bought AMCX Thursday,at $67.5299 and at $66.65, its lowest share price since my first article. Patience paid off, as holding initial buy orders until after the Q2 earnings got me in the tactical price range as suggested originally. AMCX shares sold off considerably, as Q2 results (SA Market Currents, above) justified the brief new 52-week high of $72.46 hit the tape right at the market open, then sold off on over 3x higher volume throughout the trading day.
Yesterday, I listened to the conference call webcast, and there was no fundamental reason for the sell-off in AMCX shares. To the contrary, growth and operating results going forward are progressing on all key fronts, as a promising pipeline of new and developing content, inroads into new markets and additional carriers all point to further growth trends and potential. Brand name recognition, new markets and a larger international footprint, viewing audiences and market share (notably further Latin American expansion via DirecTV (DTV), are all positive for growth in an aggressive growth name.
I'll highlight results during Q2, as compared to both Q1 2013 and year-end [YE] 2012. To gain more familiarity with AMCX, please reference my first article. The only negative visible results were tax issues that did not significantly impact the bottom line. These were one-off items attributable to the litigation and related costs with DISH TV (DISH), settled in AMCX's favor.
Offsetting these will be the pending quarterly payments owed to AMCX, and these come with favorable tax write-offs for the remainder of FY 2013. DISH has renewed the carrying content contract with AMCX. For more detail on the Q2 2013 results and the comparisons to Q1, please review my first coverage, and/ or listen to the Second Quarter 2013 Earnings Call; 08 AUG 2013 11:00 AM ET):
Seeking Alpha's Market Currents released the AMCX preliminary earnings and revenue report: Thursday, August 8th:
9:08 AM AMC Networks beats by $1.08, beats on revenue
AMC Networks: Q2 EPS of $1.87 beats by $1.08.Revenue of $379M (+15.8% Y/Y) beats by $10.92M. (PR)
AMCX bottom line results appear above (SA Market Currents).
AMCX continues to leverage product offerings of its acclaimed and Emmy-nominated hit shows. "Breaking Bad" will premiere its sixth (and final) season, showing this Sunday, August 11th. To leverage sales for the finale season, AMCX is now offering a "Breaking Bad-Alchemy" eBook. It features behind-the-scenes clips, 360 degree set shots, character script details and dialogue, interviews with the cast and film-making crew, behind the soundtrack and lyrics -- all an opportunity to maximize revenue streams.
This year will feature a new live interactive talk show will follow each "Breaking Bad" episode, entitled "Talking Bad" in the same manner as AMCX has done with "Talking Dead," the talk show following for "The Walking Dead". The one-hour weekly show features cast and crew interaction, behind the scenes looks, production trade secrets, and live interaction with an on the set audience.
Operating Progress and Highlights
On the positive side, the firm has scheduled an after show, one hour live interactive talk show called "Talking Bad" to play off "Breaking Bad" in much the same venue that has been successful with "The Walking Dead's" counterpart "Talking Dead."
My initial concern of the debt level and debt to cash ratio being high is waning, as AMCX has made significant progress to de-leverage its balance sheet. AMCX entered FY 2012 with a highly-leveraged 5.9x debt to cash ratio. Debt has continued to pay down outstanding debt, entering 2013 with a 3.6x ratio, and ending Q2 2013 with an impressive 2.9x.
Clearly, revenue and earnings, as well as adjusted operating cash flow [AOCF], have allowed management to scale down debt. Analyst S & P Capital IQ stated earlier this year that they would consider upgrading the company's bond and debt ratings to "favorable" with a sustained result in deleveraging the balance sheet. The results are evident.
A significant step to monetizing its networks will start in Q4 2013, with the conversion of the Sundance Channel from a content channel to an advertising driven channel. This is AMCX's business model, and they have successfully executed this on the other three main networks: WE tv, IFC (Independent Film Channel), and AMC TV.
Another season of the acclaimed and popular western series, "Hell on Wheels" has also been renewed, and has additionally added a new time slot on Saturdays. Traditional peak viewing was primarily on Sunday night over prior years.
All previously offered shows have been renewed, and WE tv has additional programming. WE tv is a channel targeting a key women demographic audience, and offers a growing and renewed content schedule, largely in the drama/ romance/relationship reality venue. Viewing trend growth continues.
AMCX is continuing to scale up access and content via its other alternative platforms. Progress continues in streaming, internet, video on demand, in and around its VOOM venue. Mobile is being focused on as well.
Other notable content offerings are starting the summer release season, pending, or renewed. As covered in my first write-up, "AMC is now offering a Breaking Bad-Alchemy" eBook. It features behind-the-scenes clips, 360 degree set shots, character script details & dialogue, interviews with cast and film-making crew, behind the music, etc. All opportunity to maximize revenue streams." "Portlandia," a niche comedy, also starts a new season.
On a personally comforting note from dealReporter, my thesis that indicated a possible and potential future acquisition of AMCX is also what Stern Agee's analysis confirms. This isn't surprising, as the current M & A and consolidation activity is strong in the media and telecommunications sectors. AMCX has strong favorable growth trends and several "Crown Jewels" that are attractive for media companies. Another factoid I raised previously is Jon Paulson's holding in AMCX, it being his "second largest small cap holding," and second best idea.
SA Market Currents: August 5th, 2013; 1:38 PM
"AMC Networks (AMCX +0.9%) could be a "nice synergistic fit" for a larger media company, according to dealReporter. The company is fresh off its two-year spinoff anniversary which should remove some handcuffs if an acquirer is sniffing around."
AMCX is clearly demonstrating strong characteristics and reporting great top and bottom line results. As with any investment, I continue due diligence on all factors that might impact or change the secular trends or organic internal fundamentals. Thursday's sell-off was not due to any fundamental deterioration, and I infer that it was simply due to a doubling of the share price and price appreciation from the May $37.47 low.
Investors opportunistically took profits. The probability that the sell-off will be rallied from short term, and there is no evidence that the growth trends and share appreciation won't resume its historical, steady up-trend. AMCX is continuing to invest heavily on developing original scripted content.
I have one concern regarding AMCX's ability to maintain and grow its market share. Will the winding down of "Breaking Bad" result in a negative impact on audience retention and advertising growth? On the same note, will the premiere of its replacement slot "Low Winter Sun", a police drama set in Detroit, maintain viewing audiences in the same number?
Given the absolute stunning and impressive success that management has achieved since its initial foray in this forum, I will give them the benefit of the doubt. Advertisers and other partners and carrier affiliations have viewed the pending offerings and have expressed increased interest, and potential contracts are building up as a result.
My initial concern regarding the debt and debt to cash ratio has been allayed, due to the results of the deleveraging progress, as stated above.
AMCX is the polar opposite of its shows, "The Walking Dead" and "Breaking Bad." I continue to maintain a strong conviction and a long-term bullish position.
Disclaimer: Any investment information contained within these materials are not an intention to advise individuals to invest, sell, promote, market or advertise any company or investment products. These are the writer's opinions, and material facts contained within all contained and related content may differ materially, is subject to change, and taken from multiple sources. All investors should do suitable due diligence before making any investment decisions as a result of any facts, information, or opinions in this article.