AMC Networks: There's Hidden Opportunity With This One (NASDAQ:AMCX) (2024)

Value investing can be one of the most successful strategies that somebody can adopt. But just like any investment strategy, it comes with certain pitfalls. One of these is the dreaded value trap. In essence, some companies will look fundamentally attractive. Having said that, there will be a legitimate reason for how cheap they are trading. Sometimes, this can be due to concerns regarding major customers, fraud, litigation, or even a market that is in a permanent state of decline.

One company that I was originally up in the air about when first looking into it was AMC Networks (NASDAQ:AMCX). The company describes itself as a global entertainment firm. At its core, it focuses on distributing content to customers through a variety of major channels such as AMC, BBC America, and more. As interesting as I find this industry to be, there are certain challenges that it's facing. There are also some interesting opportunities for the firm that make this a difficult company to assess. Given the broader decline that the company is experiencing and the impact that has already had on its top and bottom lines, this creates an uncertain picture. But if management can appropriately manage the long-term decline of the company’s core operations while continuing to grow elsewhere, there could be some nice upside.

A mixed picture

Before we get into some fundamental data, it would be helpful to dig more into AMC Networks and what it does. As I mentioned at the start of this article, the company is an entertainment firm that distributes content through linear networks and subscription services. It also provides said content through other ad-supported streaming platforms and via licensing arrangements. Over its life of more than 40 years, the company has grown to operate some major brands in the broadcast television market. Examples include AMC, AMC+, BBC America, IFC, SundanceTV, and more. The firm has operations not only in the U.S. market, but also across 110 countries and territories globally. On top of this, it operates a film distribution business. Using data from 2023, distribution revenue accounts for about 74% of overall revenue. The remaining 26% of sales is attributable to advertising activities.

On the distribution side, the company charges fees to distributors that carry its network brands and content. It also generates revenue from subscriptions paid for its streaming services and from licensing its original programming. On the content licensing side, the company even sells original programming and other content under long-term agreements to major streaming platforms like Netflix (NFLX), Disney (DIS) owned Hulu, and others. On the advertising side, the company generates revenue by selling advertising on its networks. This also includes advertising revenue involving its streaming services. One thing that is probably necessary to clear up is the nature of the company's content. According to management, the majority of content on its networks and streaming services is content that the company has acquired the rights to from other firms. Examples of this include Law and Order, Two and a Half Men, Batman, and more. However, the company does produce some of its own content through a subsidiary known as AMC Studios, while also contracting out content production to other firms.

To best understand the firm, we should probably dig into each of its operating segments. At present, AMC Networks has two different operating segments. The largest of these is the Domestic Operations unit. This consists of the company's five programming networks, its streaming services, AMC Studios, and its film distribution unit. The other segment is known as International and Other. And this essentially consists of the firm’s international programming operations and its production services business.

Over the past few years, the financial performance of the business has been quite mixed. Revenue inched up from $3.08 billion in 2021 to $3.10 billion in 2022. But then, in 2023, sales plummeted by 12.4%, closing the year out at $2.71 billion. On the subscription side of things, revenue for the company fell by 3.6% from $1.62 billion to $1.56 billion. This decline was driven mostly by a 3.9% drop in the company’s Domestic Operations segment as affiliate revenues fell. Internationally, the decline was more modest, totaling only about 1.2% year over year. But this was actually the most stable part of the firm.

The hardest hit was content licensing. Sales there fell from $606.2 million to $435.2 million. This was a 28.2% decline over the course of just a single year. On the domestic side of things, the drop was 30.4%. It appears as though this drop was driven in large part by a falloff in deliveries during that window of time and shifts in launch timing for other content. This makes sense when you consider the strikes that impacted the entertainment industry over the past year or so. Likewise, there was also significant weakness in advertising. Revenue fell 17.9% from $871.9 million to $715.6 million. In addition to suffering from a reduction in original programming episodes, the company was also hit by linear ratings declines and overall weakness in the advertising space. This all resulted in a 19.6% plunge domestically. However, on the international side of things, the drop was a much more modest 2.1%.

Over the past three years, bottom-line performance for the company has been quite mixed. Net income went from $250.6 million in 2021 to only $7.6 million one year later. But then, in 2023, it rebounded, hitting $215.5 million. Other profitability metrics were far more stable. Operating cash flow rose consistently year after year, climbing from $143.5 million to $203.9 million. Another metric that I look at is what I call adjusted operating cash flow. This strips out changes in working capital. However, when it comes to companies in this industry, I do make a further adjustment. This adjustment is to also strip out the amortization and write-offs of program rates, as well as the amortization of deferred carriage fees. I do this because a large add-back on the working capital side of things would be program rates and obligations. Those are considered working capital items, while content amortization is not. After making this further adjustment, we can see that adjusted operating cash flow has remained in a fairly narrow range of between $481.9 million and $494 million over the three-year window covered. And lastly, EBITDA has been declining consistently, dropping from $766.6 million in 2021 to $628 million in 2023.

When it comes to the current fiscal year, we do have data covering the first quarter. And the results could certainly be better. Revenue during the first quarter of 2024 totaled $596.5 million. That's a decline of 16.9% year over year compared to the $717.4 million reported in 2023. Most of this pain came from content licensing and advertising weakness. Content licensing and other related revenue plunged 53.9% from $133.6 million to $61.7 million. Domestically, the drop was 40.1%, driven by a decline in deliveries year over year. This included $56.1 million in revenue that the company generated in the first quarter of 2023 from delivering the final episodes of the hit show Silo. In addition to this, international revenue associated with these operations plunged by 90.2%. But that was because of the firm’s previous divestiture of the 25/7 Media business that occurred in December of last year.

Advertising revenue fared far better, but it still managed to drop by 10.1%, declining from $179.6 million to $161.4 million. The biggest hit there came from a 13.2% decline domestically because of linear ratings declines and weakness in the advertising market that continued into this year. Interestingly, international operations actually saw a 16.2% rise in advertising revenue. And that was thanks to higher ratings and growth that the company was able to achieve in select parts of Europe. Digital and advanced advertising growth in the UK also contributed to this move higher. However, even subscription revenue took a hit, falling by 7.6% from $404.2 million to $373.4 million. And this was attributable to lower affiliate revenue domestically and the non-renewal of a distribution agreement that the company had in the UK.

With revenue taking such a hit, it should come as no surprise that profitability for the company dove as well. Net income was cut by more than half from $103.6 million to $45.8 million. Operating cash flow did improve, going from negative $132.5 million to positive $150.9 million. But on an adjusted basis, it fell from $140.2 million to $87.3 million. Meanwhile, EBITDA for the company plunged from $205.1 million to $136 million.

Despite these troubles, shares of the business look attractively priced. As you can see in the chart above, the company is trading at a price to adjusted operating cash flow multiple of 1.5. Meanwhile, its EV to EBITDA multiple stands at only 3.9. This disparity in valuation is driven by the fact that the company has a market capitalization of only $761.1 million, but net debt of $1.66 billion. In the table below, meanwhile, you can see how shares are priced compared to similar firms. It definitely fits on the cheap end of the spectrum.

Given how cheap the stock is, it's not unthinkable that there could be some attractive upside for investors. However, I would also argue that the company is going to be facing long-term issues that might warrant such a low trading multiple. In the chart below, you can see the number of subscribers for the company’s five national programming networks over the past three completed fiscal years. Without exception, these have all taken a hit. In fact, management even details in both its quarterly reports and its annual reports that it expects continued weakness in this space in the long run. This certainly does not bode well for the company down the road.

*in Millions

This isn't to say that there aren't reasons to be cautiously optimistic. Even though recent financial performance for the subscription side of things has been disappointing, there is some hidden growth buried deep within the firm's financial results. Over the past several years now, the company has been investing in growing its streaming operations. Undoubtedly, the most popular of these is AMC+. However, the company does have some other streaming services under its belt. These include Acorn TV, Shudder, Sundance Now, ALLBLK, and HIDIVE. From 2021 through 2023, revenue associated with these operations skyrocketed from $370.8 million to $565.6 million. That growth has continued into the current fiscal year. In the first quarter of 2024, $145.1 million in revenue came from streaming services. That's up from the $140.9 million generated one year earlier. The growth that the company has achieved is almost certainly because of a growth in user base. Unfortunately, management does not provide much in the way of historical data regarding this. But they did say at the end of the 2023 fiscal year that they had 11.4 million subscribers.

An example of hidden value here could involve the firm's anime streaming service HIDIVE. Back in 2021, I wrote about the decision of AT&T (T) to sell its streaming service, Crunchyroll, to Sony (SONY) in exchange for $1.175 billion. At that time, the service had 3 million paid users on its platform. Without assigning any value to the 90 million registered users, this translated to roughly $392 per subscriber in value. Having said that, with a smaller market presence and a lower monthly fee that the service charges than what Crunchyroll does, largely because of a much smaller content library, it's almost certain that HIDIVE would be worth less than this. What's really exciting about this is that anime is expected to further grow in popularity in the years to come. In fact, just last year, the Japanese government set an ambitious target to support the industry with the hopes of growing it to $129 billion in annual revenue by 2033. That would be well above the $30.3 billion that the industry was worth in 2022.

Unfortunately, we don't know exactly how many subscribers are on HIDIVE. But if we apply even a value of $300 per subscriber across the 11.4 million subscribers that the company has split between all streaming platforms, that would imply value of $3.42 billion today. That would be well above the $2.44 billion in enterprise value that AMC Networks has today. While the company is growing this set of operations, which will be admittedly difficult in what has become a mature and competitive market where even the big players are struggling to achieve profits as opposed to losses, AMC Networks will also have to combat the continued decline of its core business. This won’t be an easy task by any means, but it does pave a way for attractive returns for investors in the long run.

Takeaway

Fundamentally speaking, AMC Networks is dealing with some issues. Having said that, shares are incredibly cheap at this point in time. The value investor in me wants to use this as an opportunity to be bullish. This is especially true when you look at the streaming services of the company and the potential value they could bring. On the other hand, you have the sorry state of its core business that will continue to weigh on the business moving forward. This definitely makes the picture less appealing than I would like it to be, but I think there is just enough potential where it counts to warrant some optimism.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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