New FCC Approval; Say Goodbye to Power Cords
The FCC recently green lighted a stunning breakthrough device that will revolutionize electricity and get rid of the need for any plugs or cords. The Washington Times says that this technology “will change the world on a scale hardly seen in human history.” Even famed scientist Stephen Hawking agrees that “it’s about to change your life.” And this technology is set to pour $37.2 billion into this sector. But only one small company is at the center of this massive shift.
For much of the past year, a lot of attention in the Media industry has been focused on two big transactions. Last month, AT&T (T) completed its acquisition of cable giant Time Warner Inc.; that was a deal that had been pending since late 2016 until it finally cleared much-publicized regulatory scrutiny. In December of last year, The Walt Disney Company (DIS) announced it was submitting a bid to acquire assets from 21st Century Fox that included its movie and TV production studios, and a controlling stake in streaming service Hulu. Not long after that Comcast Corporation (CMCSA) submitted its own competing bid. DIS countered with a much higher bid, and this morning Comcast officially withdrew its bid, clearing the way for the Disney-Fox deal to be completed in the near future.
What does it mean, for Comcast and the rest of the industry? Comcast has indicated that part of the reason for withdrawing from the bid for the Fox assets was so it could focus on Sky Plc., the international telecomm company based in London. That acquisition would give Comcast a big piece of international sports programming in particular. DIS has previously indicated they wanted that business as well, but with the deal with FOX now nearing completion, that could change. I don’t think the story is done being told, however, for either CMCSA or DIS. These are without question the two largest media companies in the U.S. by market cap, and don’t be surprised if the M&A game continues as each seeks to keep looking for more ways to differentiate themselves from each other.
One potential target that nobody is talking about right now is AMC Networks Inc. (AMCX). Streaming, on-demand content continues to become more and more pervasive, which puts pressure on broadcast networks to keep creating compelling programming to draw viewers to their stations. AMC is a mid-cap company with a growing library of hits; it starts with The Walking Dead, which has become a pop-culture phenomenon, and includes other current shows like Into the Badlands and Preacher. This is the network that has produced a number of popular shows over the years like Breaking Bad and Mad Men. Their ability to draw viewers to new shows – and binge previous seasons on streaming services – could make them an attractive target for either DIS or CMCSA down the road. Even if AMCX isn’t an immediate target, the fundamentals for the stock are interesting, and the stock’s current price activity could set up a couple of attractive short-term trades.
Fundamental and Value Profile
AMC Networks Inc. (AMCX) is a holding company, which conducts all of its operations through its subsidiaries. The Company owns and operates entertainment businesses and assets. It operates through two segments: National Networks, and International and Other. National Networks includes activities of its programming businesses, which include its programming networks distributed in the United States and Canada. The International and Other segment includes AMC Networks International (AMCNI), the Company’s international programming businesses consisting of a portfolio of channels in Europe, Latin America, the Middle East and parts of Asia and Africa; IFC Films, the Company’s independent film distribution business; AMCNI- DMC, the broadcast solutions unit of certain networks of AMCNI and third-party networks, and various developing online content distribution initiatives. National Networks’ programming networks include AMC, WE tv, BBC AMERICA and SundanceTV. AMCX’s current market cap is $2.9 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew more than 26% while revenues were mostly flat, posting an increase of about 3%. Margins are healthy since Net Income was more than 17% of Revenues over the last year and above 21% for the last quarter. Like most traditional programming networks, the company has experienced challenges in growing revenues from advertising as viewers have increasingly turned to streaming services. AMCX is shifting with the trend, introducing their own on-demand streaming services and looking for additional ways to diversify their revenue stream away from a primary reliance on advertising.
- Free Cash Flow: AMCX’s free cash flow has declined from a high at around $430 million at the beginning of 2017, but remains healthy, at more than $286 million.
- Debt to Equity: AMCX has a debt/equity ratio of 11.97, which is a high number at first blush. The company has more than $3.1 billion in long-term debt, but their balance sheet indicates operating profits are more than adequate to service their debt. They also reported cash and liquid assets of more than $529 million in the last quarter, which should give them good flexibility and liquidity.
- Dividend: AMCX does not pay a dividend.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for AMCX is $4.36 and translates to a Price/Book ratio of 14.24 at the stock’s current price. The industry average is only 5.6, and their historical average is 12.76, which implies the stock is overvalued right now. I think it is also worth noting that AMCX’s Book Value has increased steadily from 0 since the beginning of 2017. Analysts generally expect the company to maintain its healthy profitability profile, with small revenue growth and greater debt reduction, for the next couple of years.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s long-term upward trend, from a low around $46 per share in November 2016 to a high point in the early portion of June of this year around $69 per share. The stock has dropped from that point to its current level around $61 per share. The horizontal red lines trace the stock’s Fibonacci retracement lines, with the 38.2% line just a little below the stock’s current price. That line provided a support point earlier this month, and it looks like it should do that again. A bounce of that support level with strong buying volume could give the stock room to run to retest its high around $69 per share. It’s all-time high is around $85 and was reached in May of 2015. If the stock breaks down and drops below support around $60, its next most likely support levels are at the $57 and $55 levels, respectively.
- Near-term Keys: A push to $64 with good buying volume could offer an interesting short-term bullish swing trade, by using call options or buying the stock outright; in that case, look for an exit price between $68 and $69 per share. A break below $60 could set up an interesting short sale or put option trade, with about $3 down to the support level forecast by the 50% retracement line, or $55 in conjunction with the 61.8% line.