Off The Meth, AMC Finances Could Break Bad
Stock in AMC Networks (AMCX) has climbed more than 60% in the last year, as successful investments in original programming are driving impressive growth in overall financial results. Unfortunately, as the cable network continues to depend disproportionately on aging shows at its eponymous channel AMC for the bulk of its revenue and cash flow, investors should begin questioning management’s continued ability to profitably monetize upfront deals with advertisers come 2015.
Second quarter revenue and (adjusted) operating income increased 15.8% and 14.6%, respectively, to $379 million and $114 million (excluding litigation settlement gains) versus the prior year, led by record audience ratings for year three of its zombie hit The Walking Dead.
Referencing the ratings success of AMC cable shows like The Walking Dead and the western Hell on Wheels, chief executive officer Josh Sapan told analysts on the quarterly earnings’ call that the company was expanding original content on its three other channels, too: IFC, home to eclectic comedy shows and independent films; Sundance Channel, devoted to the airing of documentaries, award-winning film classics and scripted dramas; and, We tv, a women’s network showcasing “unscripted” reality shows celebrating everyday women and stars like Joan Rivers or singer Toni Braxton.
“We feel pretty good about the challenge and particularly good about the expansion of our programming initiatives,” said Sapan.
However, the success of several AMC channel shows, such as Breaking Bad and The Walking Dead – number one in the coveted 18 – 49 year-old demo group across all broadcast television – hasn’t pushed the ratings dial for all of AMC’s properties. AMC Network was the 11th most-watched cable channel during prime-time as of week-ending August 11, according to data compiled by Nielsen ratings.
Mad Men and Breaking Bad - both in their final seasons - combined with a limited international presence (an anemic $30 million in revenue), suggest near-term prospects for continued growth could be at risk. Initial ratings for new programs belie Sapan’s cozened optimism, too: A new cop drama on AMC, Low Winter Sun, which followed the season-5 return of Breaking Bad, lost close to 60% of its lead-in audience in its debut outing earlier this month.
At WE tv, its top-performing shows, Braxton Family Values and Marriage Boot Camp have helped push the affiliate to become the number one network among the targeted demographic (women 18 to 49), according to CEO Sapan. However, actual cable audience numbers are less than impressive: Singer Toni Braxton’s reality show – on a good night – will bring in 929,000 viewers, versus 2.1 million for a “Big Bang Theory” rerun on TBS or 4.2 million for Swamp People on the History Channel.
WE tv looks to be an “also ran” against established competitors trading in female-focused shows, too: In its eight season, E! network’s Keeping Up With the Kardashians still averages 3.0 million – more than 3 times the audience for Braxton’s show – and the aging Project Runway on Lifetime brings in 2.0 million viewers.
Going forward, AMC’s ability to produce and monetize content will take money – lots of it. In terms of free cash flow, the company bled $154 million for the six months ended June 2013. Excluding $234 million of payments related to the settlement of legal disputes involving Cablevision Systems (CVC) and DISH Network (DISH), free cash flow was a negative $80 million.
As of June 30, the company had $2.2 billion of outstanding debt, with cash and equivalents of $449 million, for a net debt position of $1.7 billion. Trailing twelve-month leverage ratio was 3.5 times, slightly higher than the industry average of 2.5 to 3.0 times adjusted operating cash flow. With management reiterating on the quarterly call its intention to continue investing in programming and marketing across all four channels, investors ought to expect volatility in both operating cash flows and net margins.
Given a limited portfolio of original, scripted content and uncertain prospects of garnering ratings’ wins for new shows, investors might want to rethink bullish positions in AMC Network. A comparison of peer PE ratios, such as CBS (CBS) and The Disney Co. (DIS) further reinforces this brewing risk profile too.
David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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