ANDREW TYLER – [email protected]
ANDREW TYLER
JULY 2019
AMC NETWORKS TRADE IDEA TICKER: AMCX
ANDREW TYLER [email protected] 917 – 704 – 5603
ANDREW TYLER – [email protected]
AMC NETWORKS (TICKER: AMCX)
SUMMARY:
AMCX present a value investment in entertainment content. The company is generating positive, and increasing FCF, via organic and inorganic growth. As one of the only pure plays in the industry, it may become a takeout target as companies fail to capitalize on the Netflix-like business models.
TRADE - Buying at these levels, target $70, or +29% in upside. Can gain exposure via cash or derivatives. For derivatives investors, you may consider a bullish cushioned collar, buying the Sep 60 call funded by selling the Sep 45/50 put spread; this structure is $.30 debit (ref: $54.30). This structure includes the next earnings release on July 31st.
BACKGROUND:
Market Cap: $3.1bn. EV: $6.1bn.
EV/EBITDA: 6.47. EV/Revenue: 2.02. P/E: 7.23x. Forward P/E: 6.19x.
Given NFLX’s earnings miss, the question about content was raised. There are several deep-pocketed players, like AMZN, DIS, and T, among others; but, there may be an opportunity in niche player AMCX.
AMC which operates AMC, WE TV, BBC America (JV with BBC), IFC, and Sundance recently acquired RLJ Entertainment (“RLJE”) and Levity Entertainment Group (“LEG”). Both RLJE and LEG are part of the international division. RLJE has an extensive entertainment library and LEG, a vertically integrated entertainment company, gives exposure to comedy content, both video and live, including comedians such as Amy Schumer, Cedric the Entertainer, and Jamie Foxx. In 2019q1, RLJE added $22mm in revenue with an operating loss of $3mm (adj. operating income of $0). LEG added $43mm in revenue with operating income of $2mm (adj. operating income of $4mm).
AMC has anchor content, like Killing Eve and The Walking Dead, the latter of which already has one existing spin-off and a second spin-off greenlit. Killing Eve won the Peabody Award and The Walking Dead is the #1 show on basic cable for the ninth consecutive year. Management believes The Walking Dead has economic prowess similar to Law & Order, CSI, and Star Trek.
AMC provides, “…highly immersive, high end mostly scripted content” which may make it the best ad- supported premium TV environments. An advertising offering that is not matched by AMZN, NFLX, or T’s HBO.
Management’s Stated Priorities:
Create a distinctive brand and content Increase distribution of content. Current process: o Create libraries and expand domestically o Launch libraries overseas once they reach critical mass o Lower cost basis, below that of competitors o Selectively produce or license content Diversify revenue, specifically expand content studio ownership and genre-specific direct-to- consumer ANDREW TYLER – [email protected]
o They are advancing with AdTech through their Aurora and Mediator products. Aurora is a planning tool that allows ad buyers to make their buys more efficient and is not limited to AMC’s family of networks but can be used across any network. Mediator is a targeting tool that allows advertisers to get to the right demographic. Combined, AMC is able to increase the number of blue chip advertisers and raise the average selling price. Currently, the company is working with GM and JNJ. Maintain a strong balance sheet to effectively compete against larger rivals
BULL THESIS:
Expansion of anchor content, Killing Eve and The Walking Dead, to international markets. This drives both advertising and licensing revenue. Expansion of BBC JV to better monetize Planet Earth and Frozen Planet. Increased FCF leads to increased buyback. During the 5/1/19 earnings release, the company had $558mm of its $1.5bn repurchase remaining. As management continues to execute, the company becomes a takeout target as we see companies vertically integrate content production and distribution, like AMZN, NFLX, and T. Given a $6bn EV, AAPL or AMZN could make sense as a suitor.
BEAR THESIS:
The company lacks the “must-see” content of news and sports, so the stock will continue to trade at a discount to the group, irrespective of management activity. Continued declining subscriptions due to competition and macro factors, such as deteriorating household balance sheets. Advertising revenue comes under pressure as cord-cutting reduces total viewership and companies adjust their advertising mix.
VALUATION:
Street coverage has 19 analysts following the name with 7 Buys, 10 Holds, and 2 Sells. Price appreciation could lead to several upgrades providing positive momentum on the stock. Average target price is $62.33, representing 14.8% upside.
My conservative DCF estimate shows almost 30% upside in the name, based upon the following assumptions:
Management delivers on its revenue guidance of single to mid-digit revenue growth. Operating margins remain near, but slightly lower than recent levels to reflect an increase in future marketing costs. Capex remains at current levels
On a P/E multiples basis, the stock could move to $90, +65.7%, if AMCX moves towards the median using FY2019 consensus EPS estimate of $8.49. That would require AMCX to expand its P/E from 7.15x to 10.66x. This could occur if we see greater than expected benefits from acquisitions and continued growth in advertising revenue. ANDREW TYLER – [email protected]
AMC Networks [Ticker: AMCX] ($mm) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Revenue $ 2,176 $ 2,581 $ 2,756 $ 2,806 $ 2,972 $ 3,061 $ 3,184 $ 3,343 $ 3,443 $ 3,512 growth rate 18.61% 6.78% 1.81% 5.92% 3.00% 4.00% 5.00% 3.00% 2.00%
Cash Flow From Ops $ 373 $ 370 $ 514 $ 386 $ 607 $ 582 $ 605 $ 618 $ 620 $ 615 margin, % rev 17.14% 14.34% 18.65% 13.76% 20.42% 19.00% 19.00% 18.50% 18.00% 17.50%
Capex $ 40 $ 68 $ 79 $ 80 $ 90 $ 92 $ 96 $ 99 $ 102 $ 102 margin, % rev 1.84% 2.63% 2.87% 2.85% 3.03% 3.00% 3.00% 2.95% 2.95% 2.90%
FCF $ 333 $ 302 $ 435 $ 306 $ 517 $ 490 $ 509 $ 520 $ 518 $ 513 margin 15.30% 11.70% 15.78% 10.91% 17.40% 16.00% 16.00% 15.55% 15.05% 14.60% Terminal Value $ 7,545 $ 490 $ 509 $ 520 $ 518 $ 8,057 WACC 10.00% Growth Rate 3.00% Implied EV $ 6,614 Net Debt $ 2,554 Implied Market Cap $ 4,060 Shares Outstanding (mm) 58.00 Implied Stock Price $ 69.99 Current Stock Price $ 54.30 19-Jul-19 Implied Change 28.90%
Symbol Name MKT CAP ($bn) EV ($bn) P/E ttm P/B P/CF EV/EBITDA EV/SALES REV GROWTH BETA DIV DIV YLD NFLX Netflix Inc $ 137.8 $ 145.4 119.50 22.58 N/A 74.34 8.24 27.0% 1.26 $ - 0.00% LBTYK Liberty Global Ord C $ 20.1 $ 50.2 10.75 4.69 3.7 10.35 4.26 0.8% 1.46 $ - 0.00% CBS CBS Corp $ 19.0 $ 28.9 6.27 4.36 16.6 9.25 1.94 5.7% 1.19 $ 0.72 1.40% DISCA Discovery Comm A $ 21.5 $ 39.8 22.95 2.58 7.6 7.83 3.63 44.7% 1.47 $ - 0.00% ROKU Roku Inc $ 12.1 $ 11.9 N/A 33.54 N/A N/A 14.68 44.8% 2.03 $ - 0.00% TV Grupo Televisa S.A. $ 5.3 $ 11.8 N/A N/A N/A 6.03 2.27 0.6% 0.91 $ 0.08 0.86% SBGI Sinclair Brdcst A $ 5.1 $ 8.2 17.22 3.29 7.9 8.90 2.63 16.3% 1.15 $ 0.80 1.43% NXST Nexstar Broadcasting $ 4.8 $ 8.7 11.97 2.53 7.0 8.21 3.12 10.8% 1.50 $ 1.80 1.72% TRCO Tribune Media Corp $ 4.1 $ 5.9 10.57 1.13 8.7 9.68 2.92 9.1% 0.46 $ 1.00 2.16% TGNA Tegna Inc $ 3.3 $ 6.3 7.80 2.36 6.3 8.04 2.83 14.2% 1.43 $ 0.28 1.82% AMCX Amc Networks Cl A $ 3.1 $ 6.1 7.15 6.77 4.7 6.47 2.02 6.7% 0.85 $ - 0.00% GTN Gray Television $ 1.8 $ 6.2 10.07 1.33 5.3 11.66 4.48 52.0% 1.99 $ - 0.00% SSP E.W. Scripps Company $ 1.2 $ 1.9 31.17 1.32 9.9 9.12 1.55 33.6% 1.80 $ 0.20 1.33% CETV Central EUR Med A $ 1.1 $ 2.0 10.02 4.83 8.0 8.79 2.86 0.9% 1.25 $ - 0.00%
MEAN 22.12 7.02 7.79 13.74 4.10 0.19 1.34 $ 0.35 0.77% MEDIAN 10.66 3.29 7.60 8.90 2.89 0.13 1.35 $ 0.04 0.43% HIGH 119.50 33.54 16.60 74.34 14.68 0.52 2.03 $ 1.80 2.16% LOW 6.27 1.13 3.70 6.03 1.55 0.01 0.46 $ - 0.00%
ANDREW TYLER – [email protected]
OPTIONS:
2019q2 earnings will be reported on July 31st. August ATM straddle is indicated $3.80, implying a 7% move in the name.
TRADE - If you find the bull thesis compelling, you may consider a bullish cushioned collar, buying the Sep 60 call funded by selling the Sep 45/50 put spread; this structure is $.30 debit (ref: $54.30).
Sep 60 Call Implied Vol = 29.22%. Sep 50 Put Implied Vol = 27.98%. Sep 45 Put Implied Vol = 30.86%.
ANDREW TYLER – [email protected]
APPENDIX
RLJ Entertainment (“RLJE”) – an independent licensee, producer and distributor of entertainment programming and film and television productions in North America, with approximately 3,200 exclusive DVD titles and approximately 340 exclusive CD titles in domestic release, and approximately 450 programs internationally via sublicense agreements. For many of its titles, Image has exclusive audio and broadcast rights as well as digital download rights to approximately 2,100 video programs and over 400 audio programs containing more than 6,000 tracks (source: Wikipedia). The company was purchased for $59mm, acquiring all shares not owned by Robert Johnson, co-founder of BET.
Levity Entertainment Group (“LEG”) - LEG Productions has produced over 100 prime-time specials with some of the biggest names in comedy, including Margaret Cho, Cedric the Entertainer, Jeff Dunham, Jamie Foxx, Gabriel Iglesias, Jamie Kennedy, Bert Kreischer, Loni Love, Sebastian Maniscalco, Jenny McCarthy, Tracy Morgan, Trevor Noah, Amy Schumer, Daniel Tosh and more, for multiple broadcast and cable networks. Collectively, Levity Productions titles have sold over 10M DVDs, been rebroadcast in over 30 countries and digitally distributed on more than 17 VOD/streaming platforms including iTunes, Netflix, Google Play, Amazon and Hulu. LEG Productions produces television programs, including original series and specials for network television, cable television, and first run syndication. LEG’s credits include programs for Food Network (Iron Chef America, The Next Iron Chef, Food Network Star), Comedy Central (The Ben Show, Gabe Iglesias’ Stand-Up Revolution, The Half Hour, The Jeff Dunham Show),[6] Syfy (Dream Machines, Scariest Places on Earth), Country Music Television (Dallas Cowboys Cheerleaders: Making the Team, Cowboy U), CBS (Home for the Holidays and Survivor Finale), Cooking Channel (Hungry Girl), History (Full Throttle, April 1865, Surviving The Holidays With Lewis Black), NBC (The Mentalist), Style Network (What I Hate About Me), and the syndicated programs Beyond Chance and Sightings (source: Wikipedia).
Adjusted Operating Income - The Company defines Adjusted Operating Income (Loss), which is a non- GAAP financial measure, as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit, impairment and related charges (including gains or losses on sales or dispositions of businesses), restructuring expense or credit, and the Company’s proportionate share of adjusted operating income (loss) from greater than 50% owned equity method investees. Because it is based upon operating income (loss), Adjusted Operating Income (Loss) also excludes interest expense (including cash interest expense) and other non-operating income and expense items. The Company believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the business without regard to the effect of the settlement of an obligation that is not expected to be made in cash.
May 5th, 2019 Earnings Press Release - https://seekingalpha.com/pr/17494628-amc-networks-inc-reports-first-quarter-2019- results
May 5th, 2019 Earnings Call Transcript - https://seekingalpha.com/article/4258582-amc-networks-inc-amcx-ceo-josh-sapan-q1- 2019-results-earnings-call-transcript?part=single
Options Payoff Diagram Tool - https://optioncreator.com/
Options IV and Term Structure: https://marketchameleon.com/Overview/AMCX/IV/ivTerm
ANDREW TYLER – [email protected]
ANDREW TYLER BIOGRAPHY
EXPERIENCE:
• Macroeconomic Research Analyst at the Federal Reserve Board of Governors; Flow of Funds group
• 10+ years of multi-asset class trading and research experience at Credit Suisse, Goldman Sachs Asset Management, and BNP Paribas
• Private Equity Investor with RidgeCrest; part of Halstatt Legacy Partners, a family office
• Venture Capital Research Analyst with NanoVest; partnered with Duke Medicine/Duke Neuro, UNC (Schools of Pharma, Dental, and Public Health), and NC State to improve commercialization/monetization of research
EDUCATION:
• BA/BA at UNC – Chapel Hill in Economics and Psychology; Mathematical Sciences minor
• MBA at UNC’s Kenan-Flagler Business School
• MSc., Finance at Georgetown University’s McDonough School of Business