Description

Recommendation: Short AMC Networks (AMCX) at current prices.

Thesis: AMCX is in secular decline and will fail in their attempt to transition from the pay tv bundle to a streaming world. EBITDA is declining quickly and will not stabilize and given 3.5-4.5x leverage their solvency is in question.

Price Target: I am 8% below street on ‘24 EBITDA driving a price target of $7/share or 40% downside assuming no change from the street multiple at 4.5x NTM EBITDA. The downside to the stock price is magnified because there is only $550m of market cap on a $3bn EV. AMCX has historically traded at a 5.5x multiple over the last 3 years, but more recently derated to a 4-5x range in the LTM as the stock has limited valuation support due to declining EBITDA. At the current 4.5x multiple I continue to see it trade within the 4-5x band it has traded in the LTM for a 2.5x up/down, with the trading multiple rangebound unless business fundamentals inflect from here. A DCF (Exhibit 3) would imply a 3.5-4.0x multiple is appropriate.

Situation Overview:

• AMCX is an entertainment company formed in 2011 as a result of the spin-off from Cablevision, a cable provider founded by media / cable entrepreneur Charles Dolan. AMCX generates revenue through 1) distributing their content on linear networks and subscription streaming services, 2) advertising, and 3) licensing out content. They own and control storied franchises such as The Walking Dead and The Vampire Chronicles, as well as operate cable services such as AMC, BBC America, and SundanceTV.
• AMCX is a subscale player in the media networks space undergoing a transition to streaming with its AMC+ service, against the backdrop of ongoing secular pressures in linear video from a challenging ad environment and deteriorating cord cutting trends. The business skews primarily domestic (85% of total revenue) with a 25% ad / 75% distribution mix, while the balance is made up from international operations of a similar composition. AMCX remains a Dolan controlled company today, and recently appointed Kristin Dolan (James Dolan’s ex-wife) as the CEO. The business has come under incremental pressure in the last 6 months and management is cutting costs wherever they can.

Why the opportunity exists:

• The street thinks that ‘23 will be the last year of EBITDA declines (-11% YoY) for AMCX, and that AMCX will be able to turn things around from here and stabilize EBITDA in ‘24 / ’25 by growing profitability through streaming. The reality is that their streaming business will not be able to stem linear declines even with extensive cost outs, and they will continue to bleed EBITDA from here.
  • Consensus has ‘24 EBITDA down -2% before stabilizing to flat in ‘25, while I see EBITDA declining at a -7% CAGR through ‘25, and I am 8% below street on ‘24 EBITDA.
• I think cracks are showing in AMCX’s streaming model when they lost streaming subs in Q1’23 for the first time ever in their history. They blamed the weakness on pivoting to higher value subs and roll-off of holiday promos.
  • However, this coincided with extensive cuts to marketing spend as part of broader cost out efforts they are doing to manage EBITDA, and is an early sign they won’t be able to grow subs meaningfully without requisite marketing spend.
  • I think streaming net adds will be impeded going forward and see 6% downside to subs in ‘24, translating to a 150bps headwind to revenue that flow through at high decremental margins.
• I think AMCX is being hit harder by cord cutting relative to peers and that will continue for the foreseeable future. As a subscale player they have less negotiating power in linear affiliate rates and hence have lower ability in driving pricing power. Their niche content could also put them in an unfavorable position if a distributor is forced to drop a channels as secular and macro pressures get tougher for the industry.
  • AMCX’s linear affiliate revenue decline accelerated to -12% (from -MHSD in ‘22) after being dropped by FUBO, which puts AMCX in stark contrast when peers have managed to keep affiliate revenue stable by taking price to offset sub declines. The street is not capturing an additional 100bps of downside from the FUBO drop alone, and there are likely more drops coming.
• Cost rationalization might get AMCX to the low end of their EBITDA guidance for ‘23 ($650-675m), but I think topline pressure will only increasingly weigh on EBITDA from here. I see 8% downside to ‘24 EBITDA vs street. Moreover, upfronts have been dire and could introduce additional downside to linear ad, but I am not meaningfully differentiated vs street.
• On my numbers, AMCX might look cheap at 5x ‘24 EBITDA vs peers at 9x, but it is hard to find valuation support when EBITDA is declining at an 8% CAGR when peers are stable / growing. FCF is also less than one would think due to cash content spend and restructuring initiatives.
  • Levered FCF multiples look optically cheap at < 3x, but the cash flow generated in this business will be used to pay down their significant debt load, with not much if any left for equity holders. AMCX is likely headed into bankruptcy with unlevered FCF declining 6% into the long-term (Exhibit 3). Credit markets see this with long-dated 4.25% Notes due 2029 trading at 55c on the dollar (17% yield).

Risks:

• Sale of the business is a possibility. I think AMCX is a viable takeout candidate in an industry that will see further consolidation, though I think it is unlikely anything is happening in the near-term under the current regulatory regime.
• AMCX is a consensus short, although absolute short interest is not high at 5% short interest / 4x days to cover, so there is squeeze risk.
• AMCX could look cheap on an SOTP basis if the library IP was sold for a $1.2-1.6bn EV that the street has floated, such that the remaining linear and streaming business looks even cheaper at ~3x EBITDA. However, majority of AMCX’s EBITDA still comes from the linear and streaming business that remains pressured, and it is hard to see a credible SOTP thesis from here without actual corporate action happening. Getting out of the streaming business also leaves behind a shrinking linear business with almost zero likelihood to inflect back to growth.

Apologies in advance: I am not able to respond to questions in the Q&A thread.

Exhibit 1: Historical EV / EBITDA

Exhibit 2: Summary Financials and Multiples

Exhibit 3: DCF Analysis

Catalyst

Catalysts:

• Each earnings print is a negative catalyst as I expect AMCX to miss and estimate revisions to follow.
• Linear subscription and advertising continue to deteriorate against the backdrop of worsening macro and secular challenges.
• Further drops in carriage as AMCX content becomes less relevant to distributors, or unfavorable renewal discussions from inability to take price as a subscale player.
• Streaming subscriber net adds firmly inflect to the negative or remains muted.