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AMC Networks Is Still Undervalued

- By Jonathan Poland

It's easy to understand why investors would want to stay away from this company's stock. AMC Networks (AMCX) has opened the year down 4% versus the S&P 500's strong 16% rise. In fact, over the last five years, even though the cable and entertainment network produced gains of 33% on the top line and 65% on the bottom, its stock lost more than 8% while the overall market is up over 50%.


That said, the company continues to be undervalued by the market. Despite the latest earnings report coming in strong with the company beating on revenue and earnings per share, the stock has slumped 8% in May. Yet, its lineup is successful even without The Walking Dead on air.

Thanks to its newest channel, BBC America, shows like Killing Eve, The Discovery of Witches and Doctor Who can only be seen in the U.S. on AMC. Its Brockmire show is a "Peak TV Home Run" according to Rolling Stone, and Fear The Walking Dead returns June 2, along with plenty of great new shows on the horizon.

More importantly, it is undercutting other content creators like HBO by offering premium subscriptions at $4.99 per month, which include access to shows not available to TV subscribers as well as all on-demand shows ad-free.

Management is addressing advertising timing issues, lower delivery, content licensing irregularities and increased programming costs, which could put strain on the financial performance.

However, AMC continues to grow its brand and financial position. It's not the hype and sizzle story of high-flying tech firms that earn no money in much more competitive environments, but that's the point. The company is trading under $55 per share and is set to earn over $8.50 a share this year and over $9.00 a share in 2020. That's $17.50 net on a $55 investment. Earnings per share were up 17.8%. You're not going to get that from Uber or Shopify.

AMC owns several cable networks, including the flagship, along with WE tv, BBC America, IFC and SundanceTV, reaching over 94 million pay-TV households across the U.S. It makes money from advertising, but if just half of those 94 million users upgraded to Premiere, it would almost double its revenue. It's probably only a matter of time before AMC does what HBO did and bifurcate its offering.

In the next decade, investors should see a $5 billion to $6 billion lift in annual revenue turnover and over $1 billion in net income. As long as capital expenditure spending remains less than 30% of profit, that should eventually translate into a $10 billion to $15 billion market value, 3x to 5x its current $3.1 billion capitalization.

Disclosure: I am not long or short AMC Networks.

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This article first appeared on GuruFocus.