AMC Networks Inc. (NASDAQ:AMCX) recently received its first rating upgrade of 2018. Analysts at MoffettNathanson are now somewhat optimistic about the stock as they lifted their recommendation on AMCX from sell to neutral.
Within the business volume of the company we find two clearly differentiated segments:
National Networks: it accounts for 85% of the company’s revenue, where the most important items are the revenues from television programming and income derived from advertising sales.
International and others: it represents 15% of the company’s sales at present, highlighting here that advertising revenues have much less presence than in the national segment. Most of the income in this section comes from Europe.
The company has established itself as strategies in the medium term to maintain and improve its position as a relevant company within the programming and entertainment sector by owning and operating some of the most popular and award-winning brands and programs in cable television. As key objectives it establishes the following:
Continuous development of original quality programming: the main objective is to increase the distribution of channels and audience by increasing their distribution channels both nationally and internationally, as well as promoting distribution through greater communication channels.
International expansion: Expansion beyond the US began in 2001, opening the market in Canada, and currently generates business in more than 140 countries.
Expansion of other distribution platforms: with the technological change that has occurred in recent years in terms of audiovisual content, AMC has adapted to this trend. It has been ensuring that its contents can be viewed from other more digital platforms such as Netflix, Amazon Prime or iTunes.
Reasons to buy:
- The media and entertainment sector is one of the sectors most benefited by Trump’s tax reform. With a fiscal pressure of around 35%, it will have a very positive effect on the profits of 2017 and 2018, with an expected 20% increase in profits in the sector by 2018. In the case of AMC, it is expected a growth of the benefits for this year 2017 of 48% in relation to the previous year.
- In recent years, AMC has been improving the margins of Gross Margin, EBITDA, Net Profit, although almost constantly. The business management has been marking a series of objectives in costs focused on controlling them to obtain constant margins assuring the business. It has been controlled administrative expenses, depreciation, amortization and salary expenses, which has managed to generate a constant operating margin for the coming years.
- The reduction of the margins and as a consequence of this the fall in stock market of 3.5% that it had in the year 2017 has been due to a series of extraordinary expenses in 2016. This type of expenses have been mainly those dedicated to non-continuous operations and outside the operating cycle of the company as well as the recognition of losses of value of tangible and intangible assets.
- Currently the AMC PER stands at 10.6x against the sector’s 20.3x, so based on this ratio, the valuation would be that the stock is relatively cheap in relation to the rest of the sector. It should be made clear that the analysis can not be based only on the multiple of the PER.
- In the most recent years the company has had a negative performance due to losses in periods prior to 2013. But the good work of the company, which has managed to change this direction in 2015 and 2016, has resulted in net profit in these years.
- Despite the great financial leverage of AMC, it has a very good interest coverage ratio around 7x.