AMC Networks Inc. Not Quite Apocalyptic

Following a second consecutive week of YoY ratings declines for AMC39s hit show The Walking Dead TWD investors have become concerned about the value of the TWD asset While we certainly do not discount the possibility that TWD ratings could enter a period of slow decline we must point out that tough YoY sports comps the last two Sunday nights have certainly played a role in the ratings pressure we have seen these viewers could ultimately be at least in part recaptured on delayed viewing We must also point out that AMCX has already successfully expanded the TWD brand this year in its successful launch of Fear the Walking Deadamp160 We remain of the view that TWD represents a powerful asset that continues to drive advertising and affiliate monetization As such while we will continue to keep an eye on timeshifted TWD ratings we view the current selloff in AMCX as modestly overdoneTough sports comps to blame We note that this week39s episode 2 of TWD faced off against both the Sunday Night Football comp PatriotsColts quotdeflategatequot rematch as well as the MetsCubs MLB playoff comparison the 1 and 3 media markets respectively Taking a step back even when including timeshifted viewing for the prior week the Live3 ratings for TWD39s season 6 premiere episode was admittedly down 13 YoY from last year39s recordsetting 224mn viewers This may indicate 1 modest TWD fatigue which we acknowledge as a risk or 2 viewership moving past the 3day window given the strong sports comps even in week 1 We also note that the TWD premiere was 90 minutes long vs 60 minutes normally which is good for monetization but which can make audience retention a greater challengeamp160What happens if TWD fatigue is truly setting in We think it is unlikely that TWD viewership erodes at a very rapid pace given the rabid core fan base TWD is likely to remain a top 3 show on television for the foreseeable future in our view As such we believe the show remains a valuable platform to launch new showsamp160 We look forward to the upcoming 4Q November premier of Into the Badlands for which TWD will act as a lead in Moreover the growing international SVOD market place remains a buoyant avenue for the company to monetize the showamp160 Finally we must acknowledge this year39s successful 3Q launch of Fear the Walking Dead which admittedly could be driving some zombie fatigue overallThough audiences slightly below fragmentation favors the leaders amp160 Even incorporating the liveratings declines seasontodate TWD remains the number 1 show in the coveted 1849 demo beating SNF in its first week Given the scarcity value of reaching a vast mainstream audience we broadly contend the industrywide viewership fragmentation benefits the audience leaders such as TWD the more difficult it is to reach a mass audience the higher price advertisers will pay to do so which could offset the impact of modest viewership declinesamp160 as TWD ad rates are up quite a bit this year According to AdvertisingAge TWD now commands roughly 500k per 30second spot up materially versus last year What happens if TWD ratings declines lead to a makegoods situation or a lower CPM Assuming a 90 incremental margin each percentage point decline in TWD advertising would impact National AOCF by just 0205 Given a 2016 lineup that includes an expanded number of Better Call Saul and Fear The Walking Dead episodes 15 vs 6 in 2015 as well as new shows Preacher The Night Manageramp160 and Broke we remain comfortable with our 7 YoY growth estimate for FY2016 AMC Network advertising growth despite these TWD ratings headwindsUpcoming schedule stable margins and potential buybacks remain positives With a strong 2016 originals lineup that includes a good mix of new and returning shows stable margins we model flat YoY AOCF margins in 2016 and strong FCF generation that should bring the leverage ratio below 25x by the end of 2016 increasing the likelihood of capital returns we believe AMCX remains an attractive asset to own Trading at 13x 2016 EPS 3x below the peer average we believe the current selloff is likely somewhat overdoneCLICK BELOW TO ACCESS RESEARCH REPORTPRESENTATION including important disclosuresAMC Networks Inc AMCX US Buy Not Quite ApocalypticThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers

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AMC Networks Inc. Not Quite Apocalyptic

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Anthony DiClemente

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