The Walking Dead Helps Make AMC An Entertaining Buy

AMC Networks   (NASDAQ: AMCX  )  has been tactical in stretching out the tenure of its high-profile shows, and creating spin-off versions from both Breaking Bad and The Walking Dead. In addition, AMC's decision to grow the distribution of its content through the acquisition of Chellomedia will lead to stellar revenue and earnings growth.

Given the success of its original series, the company's stature as a cable network has been elevated. As a result, AMC Networks is clocking record viewers in all four networks it operates.

In the last earnings report, AMC's revenue grew 19.1% to $395 million, driven by stellar increases at the company's national networks. The company should continue to generate healthy returns from its investments in original programming across its channels.

Viewership on the rise
All the networks of AMC, including AMC, IFC, Sundance Channel and WE tv, have seen growth in viewership. The company saw strong demand for its original programming, which has been driving the company's ad revenue. AMC's distribution revenue has been increasing due to higher affiliate fees and newer distribution channels like over-the-top platforms such as Netflix (NASDAQ: NFLX  ) .

The company's International segment, which includes Sundance Channel Global and IFC, saw a 7% increase in revenue in the last quarter, but is still running at an operating loss. The Sundance Channel was generating sales through sponsorships, but has recently shifted to the traditional advertising model used by other channels.

The Walking Dead, the most-watched drama show in basic cable history, kicked-off  its fourth season with a record 16.1 million viewers, and if time-shifted playback is taken into account, the premier surpassed 20 million viewers. And The Walking Dead is has returned with the second half of its Season 4 this past weekend, which should continue to aid AMC's advertising revenue growth and give the company more leverage in growing distribution fees from affiliates.

Good development slate
The company's serialized shows, including Mad MenBreaking BadHell on Wheels and The Walking Dead, have all received substantial tailwinds in terms of gaining new viewers and awareness through their availability on Netflix and other Internet on-demand platforms. The 44 million worldwide subscribers of Netflix have been binge viewing the past seasons of AMC's shows, which in turn led to record viewers when those shows premiered with the most recent seasons on AMC's cable channel.

AMC is continuing to invest in content by developing a bigger roster of original shows and through ramping up its distribution capabilities. AMC is adding two new drama series, Turn and Halt & Catch Fire, both of which will be premiering later this year. The Walking Dead will have a companion show, and Mad Men has two more seasons to go. Since Breaking Bad won 2 Emmy Awards and ended with 10.6 million viewers, the company's spin-off show, Better Call Saul, will have a large built-in audience when its airs on AMC.

And since AMC is a content company, the company will be requiring a couple of successful shows after it canceled Low Winter Sun and the end of Breaking Bad. In addition, the other networks owned by the company are increasingly investing in more original programming and trying to get more distribution globally.  

Broader distribution increases the value of content
AMC just completed the acquisition of Liberty Global's international content arm, Chellomedia, for $1 billion, which gives it a broad portfolio of international cable networks that have massive reach. Chellomedia's TV channels are distributed to more than 390 million households across 138 countries and will give AMC Networks the opportunity to distribute its original shows from AMC, IFC, Sundance Channel and WE tv through Chellomedia's outlets.

Chellomedia is a good business with decent margins and strong cash flows. Half of the Chello channels are movie and entertainment channels, which can utilize AMC's content right away. The Chellomedia acquisition will enable AMC to generate a lot more revenue from advertising and affiliate fees by helping with its international strategy.

In addition, it launched the Sundance Channel in Latin America with DIRECTV  (NASDAQ: DTV  ) . DIRECTV is not only the largest pay TV provider in the world, with more than 37 million subscribers, but also the largest in Latin America. DIRECTV's presence in that region is growing rapidly with more than 17.8 million subscribers, and is gaining momentum especially in Brazil and Mexico.  

Going forward
Distribution magnifies the value of content and helps broaden the reach of AMC's very popular shows. Chellomedia is a great strategic acquisition and will help with revenue and profit growth in the years ahead.

And more hit originals will translate into broader exposure for AMC Networks and increase its audience. Once things really get rolling, it will be able to monetize its assets more efficiently and generate a lot of value for shareholders.

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