AMC Networks - "Making of the Mob" Mentality - Anthony DiClemente, Nomura Global Markets Research
AMCX national networks revenue and AOCF provides upside, but broader market anxieties remain
AMCX reported total company earnings of $1.14, vs our $0.98 estimate, and the forward outlook was robust, with 3Q advertising growth expected to improve off of 2Q, and with recurring affiliate growth in the double digits. While there are certainly commonalities between AMCX and industry peers who are suffering from market-driven anxieties this week, we are encouraged by AMCX's strategic content strategy, its valuation relative to growth, and its strengthening balance sheet. That said, we are modestly lowering our 3Q estimates (though 2016E EPS goes slightly higher). Given the recent multiple compression in the space we are also modestly reducing our target 2016 P/E multiple to 16x (down from 17x), which leads to our new TP of $86 (from $92).
**Ad growth at AMCX remains at the high end of industry. Due to the strong 2Q results of Mad Men, AMCX remains the sector frontrunners in terms of ad growth. Further, 3Q commentary was for a sequential improvement in ad growth trajectory over 2Q's low-single digits, largely given the expanded programming lineup (Fear the Walking Dead, Humans).
**Mid-teens affiliate growth in line with our estimates, driven by carriage renewals. The company's 2Q affiliate growth was in line with our estimate for mid-teens growth; the quarter also benefited from sales of Halt and Catch Fire. AMCX's 3Q outlook is for double-digit affiliate fee increases, slowing somewhat from 2Q given cycling of recent carriage renewals.
**Margin trajectory continues to be a strong point. Excluding BBCA, expenses were up mid-single digits YoY, in line with our estimate. AMCX is managing to "broadly stable" margins with 2014 levels, which, in our view, may leave room for some YoY margin expansion given the progress that AMCX has made on cost discipline year-to-date. Net-net for next quarter, we are looking for overall AOCF growth of 22% YoY.
**Comment on subscriber trends. When asked about the subscriber trends, AMCX noted it is seeing similar trends to the industry, which we interpret to mean that management is seeing similarly modest declines in basic video subscribers, though AMCX-specific nuances were cited on the call.
**Upcoming slate continues momentum. AMCX noted the upcoming Fear the Walking Dead, which leads right into Walking Dead, and the Humans impressive debut in June where 7 more of those episodes fall into the 3Q; management is also excited about docudrama Making of the Mob.
**Modestly lowering target multiple. While we are slightly increasing our 2016E EPS estimate to $5.50, we assign a lower 16x target multiple (to better reflect the media multiple compression), which implies a TP of $86.
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