AMC Networks (AMCX) dropped almost 7% today after releasing Q4 earnings. Despite increasing revenues 8.2% in the last quarter to $367 million over Q4 2011, the company's net income decreased. Investors are dumping the stock for fear that AMC is losing profitability but this seems more like an outlier than a trend.
AMC networks was spun off from its owner, Cablevision, like a cancerous tumor in mid 2011. Cablevision loaded AMC with $2.4 billion of debt and then ejected the subsidiary to protect Cablevision's financial health. AMC still has over $2 billion of that that debt on its balance sheet to reckon with.
However, since splitting from Cablevision and going public, AMC has demonstrated consistent strength that shouldn't be deterred by the recent earnings release.
Bullish trends for AMC
1. Delivering hits
AMC is a pure play on good production. Mad Men, Breaking Bad, and The Walking Dead have inspired a renaissance in TV. Management at AMC has little control over the company's capital structure but all the decision-making when it comes to the selective process of ordering new pilots. Shows in the pipeline include: "Low Winter Sun" about a detroit detective, "Halt & Catch Fire" about early computing, and historical spy story "Turn."
2. Advertising revenue
Capturing eyeballs is critical when it comes to attracting advertisers. Fees from this revenue stream depend highly on ratings and AMC has done well with making sure its shows are rated well (see bullish point 1). Advertising revenue was up 16% this quarter.
3. Affiliate revenue
Over half of AMC's revenue comes from affiliate fees. Those are the distributors in the cable TV world. The fees payable to AMC are rising. Loyal fans are willing subscribe, switch, or download to have access to AMC's premier content. AMC has a lot of operating leverage in negotiating attractive fees for itself. Once again, hit shows are important (point 1).
4. DISH debacle is over
Previously, AMC had forked over a chunk of its revenue in legal fees in pursuing lititgation for a breach of contract with DISH. At the same time, AMC lost affiliate fees from the distributor. The issue finally settled last quarter with $700 paid in damages. AMC can claim up to half the settlement which is roughly a quarter of its annual revenue. In addition, it has secured a new long-term affiliation with DISH. Ending the dispute is a huge win for AMC.
5. Network subscribers
Subscribers for all AMC network channels, AMC, WE tv, IFC, and Sundance have grown steadily. Figures show a significant decline during the dispute with DISH but increased distribution this year should see these recovering and attracting more advertising.
AMC's share price has steadily appreciated up to this week while debt levels have been contained.
AMC has proven its ability to deliver high value content while surmounting several challenges. The company is managing its debt and should be pursuing better financial health now that the legal dispute with DISH has come to an end. Several bullish signals are tied to AMC's ability to release more critical hits. That remains a continued risk but management hasn't let the viewers down yet. AMC has its rough patches but the trend has been toward greener pastures.
Written by Freda Ding.