Oh, no. This is not good news for AMC Networks (NASDAQ:AMCX) stock at all.
Early this morning (and in case you're wondering, independent of any negative earnings news), analysts at investment megabanker UBS announced they are downgrading shares AMC Networks stock. And this isn't a little downgrade, either. UBS says it's time to actually sell AMC.
Now, this is a pretty curious rating, given that AMC Networks stock only costs about $57 and change today, and that UBS sets its price target at $57-even. Ordinarily, such a small difference between an analyst's assessed value of a stock, and what the market is paying for it, would imply a neutral or hold rating -- not a sell.
So to give you a bit more color on the ratings, change, here are three reasons that UBS thinks you should sell AMC Networks stock despite its stock price.
1. Fear The Walking Dead
It's almost impossible (and not even advisable) to evaluate AMC Networks stock independent of its marquee franchise, the cable hit The Walking Dead. It's a wild hit with viewers, and one of the most popular shows on cable TV. Nonetheless, the show may be beginning to show its age. Season 6's finale in April for example, saw viewership down 10% in comparison to last season's finale. And UBS worries that we will see "further declines in The Walking Dead ratings this fall."
2. Fear Fear the Walking Dead, too
Meanwhile, AMC's Fear the Walking Dead spinoff, which was supposed to help breathe new life into the original, and give new legs to AMC's zombie apocalypse brand of television, is looking like something of a flop.
Fellow Fool Tim Beyers recently called out Fear for its "steadily declining live ratings since drawing more than 10 million viewers in its August 2015 debut." And while Tim sees better prospects for AMC's Preacher and Better Call Saul series, UBS isn't convinced either of these shows will be enough to save AMC as a stock. Saul, says the analyst, suffered "strong double-digit ratings declines" last season, and ratings for both Preacher and another new series, the David Schwimmer vessel Feed the Beast, have been likewise "lackluster."
3. Will the patient live?
Put it all together, and ratings aggregator StreetInsider.com sums up UBS's feelings on AMC Networks stock thusly, quoting the analyst's blunt assessment: "We do not see any near-term catalysts to resolve these concerns."
And that, as the saying goes, is the good news.
The bad news is that across the television industry, UBS forecasts "a 2H16 deceleration in core national TV advertising sector growth" that will hurt AMC even as it hurts everyone else. UBS also worries that AMC Networks will get shut out of Hulu's new online pay TV service next year. Both of these factors threaten to starve AMC of cash needed to develop new original programming to replace series that are slumping.
The most important thing: Valuation
All of these qualitative factors convince UBS to downgrade AMC Networks stock despite a valuation that the analyst describes as both "not expensive at 7.6x CY16 EV/EBITDA," and, curiously, "slightly over-valued relative to our long-term earnings power concerns." Because those are clearly contradictory statements. Let's see if we can make more sense of them by using some more common valuation metrics.
Currently, AMC Networks stock sells for 11.6 times earnings -- about half the going rate on S&P 500 stocks. Most analysts believe that valuation will get even cheaper based on an expected 18% surge in earnings this year (the forward P/E ratio is only 8.9). That said, most analysts also share UBS' concerns about long-term growth prospects, predicting an annualized earnings growth rate of only about 10% for AMC (according to S&P Global Market Intelligence estimates).
Is that too much to pay for AMC stock? 11.6 times earnings for 10% growth? Honestly, if it weren't for the fact that AMC Networks is carrying so much debt ($2.3 billion net of cash, or about half its own market cap), I'd be inclined to say UBS is jumping at shadows. As it stands, though, I look at the stock, trading for a debt-adjusted P/E of 18, and am more inclined to agree with UBS.
It's not an egregiously overpriced equity, but AMC Networks stock still costs too much to buy.