Streaming Development, Stable Money: Betting On AMC Networks’ Monetary Future (NASDAQ:AMCX)

Funding Thesis

AMC Networks (NASDAQ:AMCX) has been dealing with secular headwinds as cable cord-cutting continues to strain top-line development. Nonetheless, regardless of the persevering with development away from cable, AMC Networks continues to indicate robust free money circulation as they streamline operations and give attention to area of interest high quality content material for choose demographics. I consider the inventory is undervalued as earnings and free money are prone to proceed as AMC Networks can leverage spin-off exhibits from their extremely praised content material. Moreover, the corporate is seeing optimistic momentum of their streaming enterprise, which may offset continued declines in cable.

Content material Is King

AMC Networks is a worldwide leisure firm that owns and operates cable tv networks and streaming companies. Their enterprise mannequin is predicated on distribution of their programming and promoting. In line with their 2023 annual report, “In 2023, distribution revenues and advertising sales accounted for 74% and 26% of our consolidated revenues, net, respectively.” Distribution revenues seek advice from the “fees charged to distributors that carry our network brands and content; subscription fees paid for our streaming services; and revenue earned from the licensing of our original programming.” Promoting refers to “selling advertising time on our programming networks, on digital platforms we own and on an increasing number of AVOD and FAST platforms in the U.S. and the U.K.” Based mostly on their enterprise mannequin, an investor ought to pay at first to the standard and amount of content material AMC Networks produces as a result of content material drives a key position in how a lot distribution and promoting income they make. The higher the content material, the extra consideration and demand for his or her companies.

Legacy Content material Creates Potential For Future Hits

The corporate nonetheless boasts award-winning authentic collection like “Better Call Saul” and “The Walking Dead”. Nonetheless, many traders are involved as these exhibits have come to their finish with the final seasons.

Nonetheless, administration has nonetheless been in a position to make use of the built-in viewers and robust model recognition to create spin-off exhibits primarily based on these iconic exhibits. I consider that AMC Networks can proceed to provide authentic, high-quality content material by leveraging its iconic mental property to create new exhibits that proceed to generate income.

In line with their Q4 press release, one among their operational highlights talks about new authentic content material for 2024, “Kicking off 2024 with highly anticipated new original programming including:

• Monsieur Spade, starring Clive Owen, on AMC, AMC+ and Acorn TV, which premiered in January.
• The Walking Dead: The Ones Who Live, starring Andrew Lincoln and Danai Gurira as their iconic characters, Rick and Michonne, premiering February 25th.
• Parish, starring Giancarlo Esposito, which debuts on AMC and AMC+ in March.
• Orphan Black: Echoes, starring Krysten Ritter, set in the world of Orphan Black, to launch on AMC, AMC+ and BBC AMERICA.”

The Walking Dead franchise continues to remain alive and produce followers and a focus again to AMC Networks. The universe is immense, and present after present can proceed to spawn from out of the legacy present. There are nonetheless at least four versions of The Strolling Useless spin-offs in some type of lively standing, with many extra prone to come. Given the expertise, focus, and model loyalty this franchise instructions, I extremely doubt that the Strolling Useless will truly fade away in peace. Due to this fact, the distribution income ought to be capable to maintain up and finally stabilize sooner or later.

Moreover, their choices are seeing some outstanding success. In line with the Q4 earnings call transcript,

“AMC+ and HIDIVE achieved their number one quarters ever in terms of viewership and Shudder and Acorn TV also showed significant strength close the year. Programming achievements included first season of The Walking Dead: Daryl Dixon, which is now the most watched season in the history of AMC+, and that includes the final season of The Walking Dead itself. VHS 85 is Shudder’s most watch film ever. The Eminence In Shadow Season 2 is HIDIVE’s the most watched season ever, and Toya & Reginae is All Blacks number one new series of all time in both viewership and customer acquisition. We had a lot of success with our shows and films last year, and the year ahead looks just says exciting.”

Regardless of this success, the web revenues are nonetheless down 12.4%, so that is nonetheless only a silver lining as an alternative of a development issue. Nonetheless, there’s optimistic information among the many thick clouds of cable cord-cutting decline. My perception is that the corporate can nonetheless efficiently shift away from cable and extra into producing authentic, high-quality content material, and construct a franchise that enables them to faucet into repeatedly to create a stream of future hits. This moderately unpopular view could maintain some weight in spite of everything, as their authentic content material continues to interrupt document excessive views.

Streaming Development Could Offset Twine-Reducing

Traders have been eyeing streaming revenues as a possible offset to the continued cable enterprise decline. For 2023, the This autumn 2023 earnings name signifies “Full years streaming revenue increased 13% to $566 million. For the quarter, streaming revenue increased 4%.” Administration continues to give attention to and present optimism for streaming development in 2024, “And we expect year-over-year streaming revenue growth in the high single-digit to low double-digit range driven by broader distribution of our offerings, selected price increases, as well as disciplined acquisition marketing efforts.”

AMC Networks introduced an ad-supported version of their streaming service known as AMC+. Displaying optimistic momentum, administration has a number of offers with different companions to unfold their model and streaming companies throughout the globe:

• Just lately accomplished a deal with Philo that provides AMC+ as a part of Philo’s video providing.
• Strong results from their partnership with Max
• Continuation of robust partnership with Constitution and Comcast as they roll out Xumo TV

Administration’s aggressive give attention to spreading their streaming companies has proven optimistic ends in the press launch. CEO Kristin Dolan says, “I’m encouraged that this year we were able to grow streaming revenue and strengthen our subscriber base, expand our consolidated AOI margin to 25%, and meaningfully grow our free cash flow.” Regardless of the ugly income declines, a more in-depth take a look at streaming exhibits thrilling enhancements. I consider traders ought to weight the streaming enterprise as a possible development driver which will offset the continued declines from cord-cutting.

Free Money Circulation Stays Sturdy

I consider that administration has run a really tight ship and their effectivity in streamlining the enterprise has paid off. Specifically, “Our 2023 results, including a healthy 34% normalized free cash flow conversion ratio, and a reduction of gross debt of approximately $460 million, a reflection of these priorities which we’re carrying into 2024.”

If content material is king, then money is queen and the enterprise is seeing a lot are available. In line with administration, they count on money to proceed to roll in, “And over the next two years, we expect to generate cumulative free cash flow of approximately $0.5 billion.” This provides as much as virtually ~80% of the present market cap, a big quantity.

A lot of this money might be used to scale back debt, as the corporate has already repurchased their senior notes. With the present free money circulation persevering with, the corporate is definitely fairly financially wholesome and solvent.

Adjusted Working Revenue margins (AOI Margin) continues to see power regardless of declines in income, “Despite the revenue headwinds, in 2023, we actually increased our AOI margin to 25%, the first year-over-year increase in margins since 2017.” Whereas everyone seems to be laser centered on the top-line declines, administration continues to indicate optimism in managing their margins and free money circulation to drive shareholder worth.

Whereas continued income declines are anticipated, I consider the margins and free money circulation will proceed to stay robust.

Valuation – Shares Are Value $20

Beginning with TTM Revenues of $2.7 billion, I consider revenues will decline 10% yr over yr for 3 years and finally stabilize. Continued cord-cutting plus a weak macro atmosphere will doubtless proceed to trigger income to say no. Nonetheless, streaming will doubtless start to offset declines from conventional cable viewership. I feel AMC Networks could possibly shrink itself into robust profitability, and administration has confirmed they will generate money and preserve margins regardless of declining income. Thus, at round $2 billion in income, I forecast internet margins of seven%, roughly across the 5-year common. That leaves income of $140 million, and divide that by 44 million shares excellent, is round ~$3 EPS.

Going ahead, the $3 EPS is probably going sustainable as administration continues to streamline their enterprise and give attention to being a distinct segment streaming supplier of distinctive content material. My $3 EPS forecast is considerably decrease than sell-side estimates of $5+ EPS, so I consider my assumptions are extremely conservative.

Then, making use of a 7x a number of on $3 of EPS will get me to round $20, rounded down. My assumptions are extremely conservative given the unsure nature of the enterprise. Even with the declines in income, I nonetheless consider the inventory is undervalued resulting from its robust free money circulation and excessive margins.

Potential Dangers

The most important threat stays the gradual shift away from cable and into streaming, which hurts AMC Networks due to declining viewership and advert income for AMC’s linear channels. The trend continues, as an increasing number of folks do not see the worth in cable anymore.

Moreover, the competitors in streaming is moderately fierce, and different platforms have more cash and sources to buy and nurture content material. Particularly, Netflix (NFLX) and Disney (DIS) are two bigger gamers which have proven some dominance and stronger numbers than AMC Networks.

Unhappy to say, however AMC would not even make the listing for prime 10 streaming companies with probably the most subscribers. Due to this smaller scale, the enterprise could undergo from larger prices per content material as a result of they lack the size economies to unfold fastened prices over a bigger subscriber base.

It was final reported within the press launch that AMC Networks had 11.4 million subscribers throughout all their platforms, which is 5% of Netflix’s subscribers. Which implies any quantity of fastened content material buy per subscriber would price AMC Networks ~20x extra as they unfold that buy over a a lot smaller base of subscribers. That is an enormous distinction, so the larger gamers proceed to take pleasure in some price benefits that stem from scale economies.

Advert revenues could proceed to be below strain as macroeconomic challenges nonetheless persist throughout the globe, though that is for all trade gamers, not simply AMC Networks. Due to continued cord-cutting, advert income will doubtless proceed to say no and proceed to strain the top-line.

And at last, their technique of concentrating on area of interest audiences that need very distinctive content material could not work because the bigger gamers are coming into these markets. Netflix has already delved deep into areas that AMC Networks has a stake in, similar to anime and comic book variations. It could be powerful for AMC Networks to proceed to distinguish as a result of if they will do it, the bigger gamers can do it as nicely with bigger pocketbooks.

Purchase AMC Networks

The bull case for AMC networks appears moderately powerful, because the market is extraordinarily pessimistic over the corporate’s future. Regardless of the plain headwinds, the corporate nonetheless generates outstanding free money circulation and vital AOI margins. Assuming very conservative estimates, a $20 share worth goal is moderately affordable, because it already reductions all of the cord-cutting and ad-revenue declines. Administration has proven nice prudence in working a decent ship and specializing in free money circulation. They give attention to decreasing pointless expense and creating high-quality content material that’s distinctive for a particular viewers. Given the promising streaming income development, I consider shares are undervalued and are a purchase.