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).