Viewers and stern critics of the contemporary scene (such as myself) are in agreement: we are seeing a new golden age of television. As a former writer/producer of television fare, and someone who has analyzed more media investments than I can remember, I can assure you that only one thing matters when it comes to television: content is king.
Well, content has been unbelievably outstanding the past few years, and it keeps getting better.
The bar is being raised by the usual powerhouses like Home Box Office and Showtime, but also by Netflix, Inc. (NFLX) and Amazon.com, Inc. (AMZN), and multiple basic cable networks. Investors have the opportunity to place bets directly on a wide variety of companies offering such product.
Of course, the riskiest and least-diversified choice is AMC Networks Inc (AMCX). And yet, despite that fact, I think AMCX may be a buy, even at these lofty levels.
AMC Networks — Vision Matters Here
At most TV networks and studios, particularly the major networks, there is a multilayered bureaucracy in place that homogenizes content as it moves up the chain. The reason for this bureaucracy is, in theory, to reduce risk by examining content from multiple persepctives.
Instead, this results in sub-optimal risk management. Each person is primarily interested in retaining his or her job, and to do so means making safe creative choices that will please his or her immediate supervisor. That’s why the major networks rarely have demanding and unique content. We’re just happy when something unique slips through, such as NBC’s Hannibal.
However, AMC Networks has vision. The head of programming, Charlie Collier, has communicated that vision. The people working with him at AMCX understand that vision, and execute on it. No, they aren’t always successful in connecting that vision to an audience, but viewers are inherently unpredictable. What’s more important is that every show AMCX has ever produced has always been unexpected, interesting, daring and unique.
This differentiation guarantees viewers are going to at least sample AMC shows that they might not otherwise sample on a broadcast network. There are riches in niches, and AMC Network’s business model is such that it only needs its programming to reach a modest audience for it to be profitable.
The advent of binge-watching and on-demand viewing only improves the situation for AMCX stock. Let’s say you are only interested in AMC’s The Walking Dead. Here in Los Angeles, you can save more than a hundred dollars per year by selecting a cheaper DIRECTV (DTV) package that omits AMC Networks and some useless basic cable channels, and get the full season of the show on-demand at Amazon for $24.
Outlook for AMCX Stock
AMCX’s earnings can be erratic because they will depend on how many shows the network has on each year, from which advertising and other fees are generated. Right now, the stock trades at 14x FY15 estimates of $4.60 per share.
AMC Networks has $300 million in cash. I don’t like that the Dolan family, which spun off AMC from their other holdings, saddled the company with $2.7 billion in debt. Fortunately, it’s only accruing with about 4.5% interest annually, and the company generated more than $250 million in trailing-12-month free cash flow.
Along with the company’s other brands — WE.TV, IFC Network, Sundance Channel and 5 other channels, there’s plenty of solid work being done here for its 390 million subscribers.
I normally would avoid this kind of pure-play, but as long as Collier leads the way, I think investors are okay.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long AMZN. He has sold naked puts against DTV at the April $85 level. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.
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