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UPDATE: Morgan Stanley Reiterates On AMC Networks As Margins Decline YoY

Dwight Einhorn

In a report published Friday, Morgan Stanley analyst Ryan Fiftal reiterated an Equal-Weight rating on AMC Networks (NASDAQ: AMCX), but removed the $78.00 price target.

In the report, Morgan Stanley noted, “Strategically, we agree with the long-term approach AMC is taking in building its networks through increased hours of original programming, often leveraging the surging usage of S-VOD platforms to drive viewership of serialized shows that AMC has developed and grown. However, we have been concerned the market was missing the long-term cost and inherent risk in making these investments, particularly given the low visibility into the timing and magnitude of releasing capitalized programming cost onto the income statement.

"In 1Q14, AOCF results were a reminder of the potential for a single quarter to highlight that risk. In this case, this margin drop is likely due in part to a shift from primarily seeing straight-line cost amortization of licensed shows toward fully-owned programming, which uses ‘ultimate' accounting. In our back-of-the-envelope analysis (see sidebar), we est. National Networks margins could have been weighed down by 250-300bps in 1Q from older licensed shows, which as a result of straight line amortization are likely loss generating as reruns.”

AMC Networks closed on Thursday at $59.97.

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