Analysts Rate AMC Networks a 'Buy' Ahead of Spin-Off from Cablevision

2:08 PM PST 06/24/2011 by Georg Szalai

They cite the cable networks group's hit shows, such as AMC's "Mad Men" and "Breaking Bad," carriage fee and ad upside and a possible acquisition by a bigger industry player.

NEW YORK - With Cablevision Systems set to spin off its cable channel unit AMC Networks on Thursday and the stock scheduled to start trading on Friday, some Wall Street observers are  recommending that investors buy the stock after the spin.

Citing programming success, carriage fee upside and a possible acquisition as early as 2012, analysts say AMC Networks shares are worth in the mid to high $40 range.

On June 16, the shares started in test-run trading on Nasdaq on a so-called when-issued basis. In the test run, shares have moved within a $31-$38.45 range and closed Friday at $35.55.

BTIG analyst Richard Greenfield on Friday initiated his coverage of the company with a "buy" rating and $48 price target. "AMC’s current valuation is compelling," he said.

Collins Stewart analyst Thomas Eagan recently launched coverage with a "buy" rating and $44 target price.

Greenfield said that two-thirds of the company's revenue comes from carriage fees and other non-advertising sources, insulating it from possible pain at a time when investors are once again concerned about the outlook for the U.S. economy.

With content and its ratings determining the success of cable networks, Greenfield highlighted how well the AMC cable brands have done, particularly the flagship AMC network, whose hit shows include Mad Men, Breaking Bad, Walking Dead and The Killing.

"A few years ago, AMC was still viewed as an old movie network by most TV viewers; now its programming is “water cooler” conversation material focused on high quality original programming," Greenfield said. "With the content pendulum swinging in AMC’s favor, we believe AMC has the ability to drive notably higher advertising sales over the course of the next couple of years."

Plus, he expects a step-up in affiliate fees starting in 2013, when distribution deals start to expire, for AMC, WE, IFC and Sundance Channel. Greenfield expects mid-single digit increases, but said if ratings continue to improve, double-digit gains are possible.

The analyst also cited two additional drivers of AMC's earnings growth over the next few quarters. "Management fees to Cablevision disappear after the split is completed, saving AMC over $6 million a quarter," Greenfield said. Second, a lawsuit related to former HD video service Voom "is progressing and is unlikely to burden AMC financials past 2012," Greenfield said.

He and Eagan also mentioned a possible sale of AMC Networks in the coming years as a likely scenario.

"The most aggressive assumption would suggest that a take-out could occur in the first quarter of 2012," Eagan said. "We think a more likely scenario could be a take-out after the fourth quarter 2012."

Meanwhile, Greenfield believes a deal could materialize in 2013. A takeover premium is likely to "creep into AMC" over the next 12 months, he believes.

"Given our view that AMC has not held talks to sell itself over the past couple of years, we believe they would not run into IRS difficulties if takeover bids came in early 2012 (safe harbor of six-months post spin)," he said.
 
While nobody expects the Dolan family that controls Cablevision sell Madison Square Garden, which was previously spun off, or the remaining Cablevision anytime soon, "we do not sense they have the same views about holding onto AMC Networks if the right bid were to be made in 2012/2013," Greenfield said. "We suspect the company will want to wait a bit longer to monetize itself, given the ramp in ratings and the potential for meaningful affiliate fee step-ups in 2013 and beyond." 

Given what he called the "relatively small size" of AMC, whose market capitalization is seen around $2.5 billion with an enterprise value of $4.8 billion, "we see a long list of potential buyers, including strategics such as NBCUniversal, CBS and Time Warner, in addition to financial buyers," Greenfield said. 

Comparing AMC's implied earnings multiple to those of Discovery Communications and Scripps Networks Interactive, the price "suggests that the market is adding a slight take-out premium," Eagan said.

At the same time, Eagan predicted that "investors may become more constructive on Cablevision" shares after the spin-off.

 

Email: Georg.Szalai@thr.com

Twitter: @georgszalai

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