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AMCX - AMC Networks


Spekulatius
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AMC. Networks is a cable network, which has produced a string of hit series like "Mad Men", "Braking Bad" and "The Walking Dead". Financial results have followed. The recent earnings miss gives an opportunity to buy into this great business at a very reasonable price:

 

71M shares outstanding for ~4.1B$ market cap @58$. Add about 2.3B$ In net debt and the EV is 6.4B$. The business generates ~ 146M$ in operating income or 110M$ / quarter after interest expense, so it yields 10% yield (annualized) on the market cap (before taxes). There is pretty minimal Capex , so this is an almost 10% pretax FCF yield.

 

The concern is obviously,  that their string of hits comes to an end, which would affect their ratings and over the long run their growth. However, I think it is very likely that at team that has produced a string of successful cable series, will come up with something new. Besides that, there is upside from the newly acquired international business, that is just breaking even now. I see AMCX ,as a GAARP stock, where the upside far exceeds the downside.

 

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The 110M$ in FCF was generated during the last quarter, so if you annualize this (multiply by 4x) , you get  a roughly 10% FCF.

 

Thanks for pointing out my error, I correct my initial post to make it clear that these values are quarterly results.

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150m of amortization of program rights. Are these contracts and when they run out they need to be renewed for them to make money? If not I only see about 70 million of net income. Which would be like 300 million on a 4.1 billion market cap, with leverage.

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150m of amortization of program rights. Are these contracts and when they run out they need to be renewed for them to make money? If not I only see about 70 million of net income. Which would be like 300 million on a 4.1 billion market cap, with leverage.

 

Yes, just straightforward accrual accounting. If you buy $5bn in program rights that last for five years you don't expense that in the year of acquisition because you realise benefits of the program rights over the full five years. As I understand it (and someone can correct me anyway) you just recognize costs on a straight-line basis over the length of the agreement. I am sure it is more complicated than this in reality, the point is that the amortization of program rights are actually a cost of doing business so should be subtracted when considering owner earnings.

 

Presumably (I haven't checked), AMC also amortizes development costs. I believe the accounting here is slightly more complex as it isn't clear how long you might recognize revenues for (I think best practice varies based on the actual economics of the production) but the principle is the same. It could actually be that development costs are in with program rights depending on whether AMC actually produced the content itself (I believe Mad Men, for example, was actually produced by Lionsgate or something) or co-produced or just had a minority equity stake in the production. Regardless, the end point in terms of valuation is the same.

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It looks like most of the programming expense is directly running through the income statement (my guess is those things like transmission rights), but some are capitalized, as evidenced by the " programming rights " asset on the balance sheet. This asset is slowly increasing in size, so that would reduce FCF somewhat, but we are probably talking about  ~ 50M$/ annual adjustment.

 

The 111M$ number I mentioned is the operating profit (after depreciation and amortization  and interest expense but before tax). Tax is in the 39M$ range, which get's you you to the net income of roughly 70M$ (and change). I looked at SNI income and cash flow statement and it looks like they do this in a similar way, so I don't think that AMCX accounting is funky. It's not dirt cheap based on present numbers, but if they continue to grow revenue and income at double digit rates, it will look very cheap in 1-2 years. This is a fairly easy to understand business, with good organic growth boosted hopefully by the recent international acquisition, which might have a long runway.

 

Technical and Operating Expenses

Costs of revenues, including but not limited to programming expense, primarily consisting of amortization and impairments or write-offs of programming rights, such as those for original programming, feature films and licensed series, participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption, are classified as technical and operating expenses in the consolidated statements of income.

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I think content creation is a pretty good business model. Very capital light, great ROIC and very scalable.

 

You have to look at the ecosystem that these guys are competing in. You have the content creators on one hand and the distribution channels (cable co, etc) on other hand. I think the cable industry in America is going to have more bargaining power since the number of distribution channels the content producers can sell to is shrinking. While these content creators can go and sell their services via the internet (netflix like model), they are going to get lower pricing.

 

Cable co buy programming in bulk and pass on the costs to the customer. If the customer had the choice to select what they want to pay for then this industry is going to change very fast and most likely for the worst depending on how desirable your content is. As an investor I would want to pick the guys with very differentiated content (ie ESPN, Discovery, Animal Planet, etc). I'm not sure what makes AMC special aside from having good shows. There are high risks on betting on having very good programming whereas picking the niche products (sports, animals, etc) is lower risk since the content itself doesn't have to be that great to attract viewers.

 

I think the market has already sniffed this out and that's why Discovery Communications and Disney trade at such high multiples whereas AMC Networks and Starz look like bargains in comparison. I guess there's the international aspect of the business, but I have no special insight on how that'll turn out.

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I think content creation is a pretty good business model. Very capital light, great ROIC and very scalable.

 

Actually content creation is very capital intensive. AMC is primarily an aggregator of programming (films) that it licenses from the studios or other rights holders for certain windows and for certain technologies. Over the past 20 years the company has gradually tried to get into the content creation business but has only been able to do so slowly as the investment is large relative to the cash flows of the aggregation business. AMC may appear cheap on a cash flow basis but it should be remembered that the future of its current model is not secure. It depends on licensing programming that may or may not be available in the future at economic prices, it depends on the current 'cable/DTV' distribution model which is currently being challenged by video over internet and for which AMC may, or more probably, does not have rights to, and it depends on creating value in content generation (series which may or may not be popular). In sum, the future cash flows of AMC are much less secure than they may appear. Management here is key. The company is an intermediary which both the content producers (or rights holders) and the retail distributors would gladly do without.

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Yep, if you check on Wikipedia the only series that AMC actually produced was the Walking Dead and it doesn't look like they had full equity anyway. Starz is different, I haven't look at the company for a while but I believe they are far more active in production (unsurprising given that the CEO is from HBO). Even then though it is tremendously capital intensive, a single episode can cost as much as $3m to make. It isn't scalable either because it isn't like you can magically extend primetime hours when you come into some hits. It is a bit like banking/insurance, you take a huge risk upfront and you have to wait to see if you did something really stupid or really smart. The difference is that when you make a mistake you are stuck with it for a while. That is the reason why Starz takes its "portfolio" approach and doesn't take 100% equity in all projects and it is why AMC didn't take full equity in the Walking Dead, it is an absurdly risky and capital intensive business. That said, this feature of the industry also explains why you can get great bargains sometimes. DreamWorks Animation in mid-teens is one example (and we are getting close to there again).

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Actually, it seems to me that content distribution is a better business than content generation. Running a film studio is a tough business - the actors are expensive, hard to retain, movies may flop etc. Likewise with sports, ESPN does not really create the content - the sports team and leagues create the content, although ESPN does shape it via production and commentaries. But for the most part, ESPN is just a heavily branded content distributor. The sports leagues could decide to go elsewhere, if they wanted to, so I don't think it's all that different from AMCX. However likewise, the sports teams itself are mostly a crappy business but ESPN if course is a great business.

Discovery does more and more scripted stuff and has evolved more into a mainstream channel. If you look at original programming, probably the channels from SNI (Scripps - Travel and Food network come closest to being a wholly owned model).

 

The content distribution business is the one that needs little capital, has less risk (they just cancel shows that don't work) and high ROIC. They need some control over the content and they need competency to select the right content for their audience, but I don't think there is too much benefit in owning all off their content (unless it can be produced cheaper internally). They just buy the content, mark it up, and collect an annuity stream of cable fees as well as advertising $. At least for the time being, that appears to be the sweet spot in the entertaining business.

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Actually, it seems to me that content distribution is a better business than content generation. Running a film studio is a tough business - the actors are expensive, hard to retain, movies may flop etc. Likewise with sports, ESPN does not really create the content - the sports team and leagues create the content, although ESPN does shape it via production and commentaries. But for the most part, ESPN is just a heavily branded content distributor. The sports leagues could decide to go elsewhere, if they wanted to, so I don't think it's all that different from AMCX. However likewise, the sports teams itself are mostly a crappy business but ESPN if course is a great business.

Discovery does more and more scripted stuff and has evolved more into a mainstream channel. If you look at original programming, probably the channels from SNI (Scripps - Travel and Food network come closest to being a wholly owned model).

 

The content distribution business is the one that needs little capital, has less risk (they just cancel shows that don't work) and high ROIC. They need some control over the content and they need competency to select the right content for their audience, but I don't think there is too much benefit in owning all off their content (unless it can be produced cheaper internally). They just buy the content, mark it up, and collect an annuity stream of cable fees as well as advertising $. At least for the time being, that appears to be the sweet spot in the entertaining business.

 

I would say that definitely isn't true. There are a whole host of more complicated reasons about basic v. premium cable, the strategies that various companies are taking, and the impact of new technologies...I don't think it is worthwhile going into them but it is worth recognizing that, in addition to the points I am going to make, they exist.

 

Okay, so the best case scenario for AMC is that they pick something that works. Great, they make lots of money and MVPDs include them in their basic line-up. Then they go back to the producer and say they want another series. You seem to suggest that the producer doesn't then go "I want double what you paid last time" or that the cast/staff/writers/directors don't go "Pay me more too". The point is that the upside when you don't own content is very limited. It isn't like you can dramatically increase your subs, you are basic cable. You can improve your penetration of MVPDs a bit and increase retrans but you are basic cable so this avenue is very limited. More to the point, you are just left in the same position a few years down the line when retrans comes up again and you have to replicate your success. You have to run faster and faster to stay still. HBO is successful because it avoided this, MVPDs want HBO, customers want HBO. I can't remember the exact numbers but a significant proportion of subscribers take premium channels. No-one signs up for cable because of AMC and it makes MVPDs very little money. There is a reason why Starz is premium and trying to replicate HBO.

 

Now it is also true that the downside is very limited too, they are just a basic cable channel and MVPDs aren't expecting much. You seem to confuse AMC with a producer though, when things go wrong they can't cancel. They have paid a certain amount of dollars for the program and they can't just return it and say the show wasn't popular we want our money back. They also don't have any inventory to fill the slot that opens up. It is true though that the downside is limited, MVPDs will keep taking your channel regardless but the problem (again) is that no-one needs you and you have no negotiating leverage with anyone (see the carriage dispute with Dish a few years ago). Customers aren't paying up for AMC so it doesn't make MVPDs money and basic cable is the first place that MVPDs go to cut when costs increase (as they are). Also, basic lineups are very vulnerable to pressure from the big content places pushing their basic and premium channels. Again, this is why Starz is doing what it is doing, why HBO is successful, and why ESPN isn't like AMC...at all, they might as well be in different industries. More to the point, that is why AMC owns Walking Dead. Your argument is based on a view that even the company itself clearly doesn't hold, it knows it is in a very weak position. Even Starz which has popular content thinks the industry is difficult so you can imagine the position AMC is in.

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shows like breaking bad and walking dead were first pitched to HBO, but they thought it wouldnt work out. So obviously AMC was in a good bargaining position. But now that tv shows are basicly in a red hot golden age, it seems a guy with an idea has more leverage now. True detective for example was a pretty big risk.

 

Now they are making a show called better called saul I think about that lawyer guy from breaking bad. Obviously everyone involved has leverage now, and AMC will make less money on it. So basicly they will have to keep getting rejected talent from HBO (because HBO is really the leader here) to make good profits. And that will probably become harder in the future because now you have Netflix, maybe amazon prime and maybe other tv channels who are willing to take more creative risk driving up the price. Where as it was first probably only HBO and maybe one other. I think that guy who created the wire worked on a low budget and didnt get paid much. But now he can easily go to other content providers if they are underpaying him now that he proved his talent.

 

It is also interesting that the X files for example is very different from the shows you have now. Every episode is like a mini movie, and that has less apeal. That was because it was harder to catch up on missed episodes back then. A show like breaking bad would never get through in the 90's or early 2000's.

 

Another problem is that now movie stars who are already famous are interested in TV. In the old days TV was something if only you couldnt do movies anymore. So game theory now dictates that you better have some (expensive) movie stars in your next show if you want viewers with all the increased amount of talented writers and channels competing for viewers.

 

Good example is woody harrelson and that other shirtless guy. They would never do a tv show 15 years back.

 

Just my 2 cents :)

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  • 4 years later...

https://www.theinformation.com/articles/amc-ceo-warns-that-big-media-deals-wont-work?eu=pzrFesTZTjUcuooD5mUMsQ&utm_medium=email&utm_source=sg&utm_campaign=article_email

 

UUnder pressure from Netflix and Amazon, the entertainment industry is slowly consolidating. But one of the smallest of the publicly traded entertainment firms, AMC Networks, is resisting the trend. And in an interview, AMC CEO Josh Sapan warns that some of the big deals underway may prove to be more challenging than anticipated and may need to be undone.

 

“I think there has been a rush at the moment toward big, and I think there is a default notion that big covers sins and that big provides insurance,” he said. “I don’t believe that to be the case, and sometimes big in the past worked, but notably it hasn’t worked and has had to be deconstructed.” He cited cultural differences as among the problems that big mergers sometimes encounter.

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He's obviously talking up his position but I'm not sure I buy the argument.  Making these small, surgical deals is fine when you have massive hit shows like Walking Dead (which is 25% of their ad revenue??!!) but hit shows are becoming more expensive, harder to promote and you're up against more competition - Amazon, Netflix, HBO, Starz, etc. etc  The one year they don't have a "must have" show, they better hope they aren't up for a carriage negotiation with Comcast or Charter.  With few other channels to package in the deal they are at the mercy of big hits.  For other cable content channels like a Discovery, even if one channel is suffering another is in ascendance and you package them up.  It's still cheap right now but unless there's another Mad Men, Walking Dead or similar about to emerge this could be difficult in 2-3 years.

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