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Don't Let AMC Networks' Soft Earnings Scare You

By Anders Bylund - Updated Feb 27, 2020 at 7:24AM

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The company is expanding its streaming services at the expense of higher operating costs and lower earnings. That's a good choice in the long run.

Premium cable TV veteran and content producer AMC Networks (AMCX 0.03%) posted fourth-quarter results early Wednesday morning. The report was a mixed bag and investors were quick to focus on the weak bottom-line result, driving share prices as much as 14.2% lower. Spoiler alert: I think that's a big mistake.

AMC Networks' fourth-quarter results by the numbers

Metric

Q4 2019

Q4 2018

Change

Analyst Consensus

Revenue

$785 million

$773 million

1.6%

$776 million

GAAP net income (loss) attributable to AMC Networks' shareholders

($8.6 million)

$72 million

N/A

N/A

Adjusted earnings per share (diluted)

$1.69

$1.92

(12%)

$1.78

Data source: AMC Networks. GAAP = generally accepted accounting principles.

AMC Networks recorded a $107 million expense for impairment of the company's international business unit. This charge included a $98 million writedown of the segment's goodwill value and a $9 million charge related to the closing of some international operations. The company didn't publish a detailed rundown of its balance sheet at this time but the total goodwill balance stood at $782 million three months earlier.

At the same time, AMC's international operations posted 6.5% year-over-year sales growth at $201 million. The national networks division saw top-line revenue fall 0.6% to $589 million. Adjusted operating profits rose 75% in the international segment. AMC's four video-streaming services for international markets recorded more than 2 million subscribers in total for the first time. Management expects to reach roughly 6 million streaming subscribers in 2024. This expansion effort added to the company's operating costs and contributed to the modest showing on AMC Networks' adjusted bottom-line result.

A young couple shoveling popcorn into their mouths while staring wide-eyed at the TV screen.

Image source: Getty Images.

Management's view of the streaming market

On the earnings call, CEO Josh Sapan pondered the skyrocketing interest in video-streaming services as evidenced by successful platform launches by Walt Disney and Apple in the fourth quarter.

"The super-rapid proliferation and adoption of streaming services took some by surprise during the events of the last several months, the stats showing 24 million Disney+, 3 million free trials for Apple because of device sales were rather breathtaking," Sapan said. "Some of them are essentially free trials but nonetheless they are a phenomenon of the combination of tech and content."

The upshot: AMC Networks shouldn't be this cheap

Those high-profile streaming service premieres have been weighing on AMC Networks' stock, driving share prices 28% lower in 2019 and another 16% lower so far in 2020. Those figures include a 9% drop in reaction to this mixed fourth-quarter report. Given Sapan's sober view of the streaming market, I disagree with the market reaction. The stock is getting cheaper because investors are worried about the threat of competing video services, but AMC Networks is free to exploit the same sector trend. A conscious effort to catch that growth opportunity while it's hot is boosting the company's revenue at the expense of weaker profits. As a result, the stock trades at merely 3.2 times trailing earnings today.

I thought AMC Networks looked temptingly affordable three months ago. The stock is 30% cheaper today and I don't think AMC did anything to deserve a haircut of that magnitude. Management has a clear view of the evolving video-streaming market and the company has an expansion strategy in that crucial sector. The non-cash goodwill adjustment doesn't scare me. AMC Networks still strikes me as a solid buy.

Anders Bylund owns shares of Walt Disney. The Motley Fool owns shares of and recommends Apple and Walt Disney. The Motley Fool recommends AMC Networks and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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