1 Media Company Crushing It: An Earnings Report

AMC Networks (Nasdaq: AMCX  ) surged 9% on Nov. 9, the day after announcing a solid Q3. Before you get on the bull and buy a few shares yourself, let's cut through the Wall Street noise, and see what numbers matter most to you in AMC Networks' Q3 earnings report.

What Wall Street cares about
Although earnings decreased slightly, AMC nonetheless surprised Wall Street.

Though analysts expected revenues to total $288.46 million, AMC beat their expectations, raking in $332 million.

Source: 10-Qs from 2011-2012

Wall Street was so pleased with the company's 17% revenue gain since Q3 2011, that they forgave AMC's 7.5% decline in net income -- from $40 million to $37 million.

Metric

Q3 2012

Q3 2011

Net Income

$37 million

$40 million

Earnings Per Share

$0.52

$0.58

Diluted Earnings Per Share

$0.51

$0.56

Source: Q3 10-Q 2012

Of course, they also understood the root of AMC's earnings decrease. From July 1 to Oct. 21, Dish Network (Nasdaq: DISH  ) dropped AMC's channels, depriving AMC of 13% of its audience. In addition, increases in marketing and programming expenses ate into AMC's profits.

Nonetheless, AMC's seemingly lackluster EPS still beat analyst estimates of $0.37. To top it off, AMC, and former parent company Cablevision Systems (NYSE: CVC  ) , won a $700 million settlement from Dish.

How to invest in AMC foolishly
Although AMC owns several lines of business, the company earns the majority (around 90%) of its revenues from its "National Networks" division. Included in this segment are AMC, WE tv, IFC, and the Sundance channel. In turn, AMC earns its revenues through (1) its subscriber base, and (2) advertising fees.

Up until the Dish fiasco on July 1, a day after Q2 close, AMC had strengthened subscriber growth.

Source: Q3 10-Q 2012

Now that Dish supports AMC networks, we should see subscriber growth rise significantly,  especially because audiences seem to crave Mad Men and The Walking Dead.

In the meantime, the popularity of AMC's programming has helped it increase its pricing power in licensing and advertising deals. (The company earns about 90% of its revenue from advertising and affiliation fees.)

Source: Q3 10-Q 2012

We can see that revenues from affiliation fees -- like licensing of AMC's shows to Netflix (Nasdaq: NFLX  )  -- increased 24%, while advertising increased 9%.

The Foolish Bottom Line
At a P/E ratio of 24.3, AMC is pricier than other properties, like Discovery Communications (Nasdaq: DISCA  ) , which trades at 20.6. With that in mind, it's also important to consider other factors, like AMC's massive $2.2 million debt. Some $1.5 million of that obligation is subject to variable interest rates. If these rates rise, AMC will be forced to spend more on debt and less on its operations. Nonetheless, AMC's subscriber, advertising, and affiliation fees will provide you with a general view of its top-line and bottom-line growth. So should you buy?

At the Fool, we don't believe in timing the market, so looking at one earning's report isn't enough. Foolish investors would do well to look at how well AMC has managed its businesses over the past several years.

One component you need to stay up-to-date on is AMC's competitors and allies --  which could hurt or help its profitability. Take, for example, Netflix. Right now, the company distributes AMC content, but is also vying for AMC viewers with its soon-to-come original programming. To see if Netflix's growth aspirations will pay off, we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


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