Advertising executives from the 1960s and zombies aren't an obvious combination for success, but they're bringing results for AMC Networks (Nasdaq: AMCX). On the back of its two popular dramas, Mad Men and The Walking Dead, the cable TV channel operator's revenue and bottom line surged on an annual basis in its just-reported 1Q. It's worth noting, though, that the impressive gains were due in no small part to a low basis caused by a delay in bringing one of those flagship shows to the screen. And more critically, AMC is not a cheap stock to buy.
Bringing the '60s back
On the surface, the estimates-beating results were superb. Revenues leaped by almost 20% to $326 million. Net income zoomed ahead by 45% to $43 million.
But then again, those big leaps should have been impressive. After all, Q1 '12 had something no quarter in the previous year could boast: fresh episodes of Mad Men. It's arguably the most respected show on TV at the moment, and its strong and loyal core audience virtually guarantees good ad sales and buy rates.
Those advertisers had to wait a while to place their ads. After Season 4 ended in 2010, the show's creators reasonably demanded a bigger payday for making what had become a cultural phenomenon. AMC hemmed, hawed, discussed, and finally acceded to the request. But that meant a gap of nearly a year and a half between seasons and thus a 2011 completely bereft of Mad Men and its lucrative ad revenue.
Flesh eaters to the rescue
Luckily, the channel had an ace up its sleeve -- The Walking Dead, a fresh twist on the zombie genre that uses the title characters as catalysts for drama rather than straight horror. As with Mad Men, AMC nearly fumbled the ball with this series when it let go of star creator Frank Darabont after the show's abbreviated first season.
Recovery was quick, though -- a new show runner was found, and the series continued, to the point where it scored (in its sophomore season) record viewership for a scripted cable program.
Change the programming, not the channel
The most successful cable channels in recent times have been the ones that overhauled their programming almost completely. For example, Bravo -- a unit of a unit of Comcast (Nasdaq: CMCSA) -- once featured high-culture fare like ballet performances and dense, arty, and usually foreign films. These days it ropes in a much bigger and ad-friendly audience by providing a steady diet of reality shows like the Real Housewives series and Top Chef.
Comcast's cable assets, including Bravo, USA Network, and Syfy, have collectively grown revenues in recent times. The opposite is true of the company's big, splashy broadcast TV asset, NBC.
Similar to Bravo, AMC was a dozy channel catering to a limited audience -- in this case fans of classic Hollywood movies. Encouraged by the success of daring, high-quality, original scripted TV series like The Sopranos on Time Warner's (NYSE: TWX) HBO, AMC decided to shift its strategy to the production of this type of program.
Although Mad Men, The Walking Dead, and high school teacher-turned-drug kingpin drama Breaking Bad took some time to draw a strong audience, all are considered good shows and all attract plenty of advertising. They compare favorably with HBO's slate of originals, which are considered the gold standard of the medium.
AMC's on a roll creatively and financially with its homegrown series; the only question is whether that'll continue. The channel has several interesting projects in development, which could either go the Mad Men route to popularity or die quickly like its well-made but lightly watched cerebral spy thriller Rubicon. These projects include a show based on the characters from the classic Martin Scorsese's based-on-fact mafia film Goodfellas, and Thief of Thieves, a sort of modern-day Robin Hood saga from the creator of The Walking Dead.
Broadcasting shows, withholding dividends
But does that make its stock a screaming buy? The fundamental case is strong; despite the absence of Mad Men in 2011, the company still managed to pop its bottom line by almost 60% on an annual basis that fiscal year. Revenue growth wasn't as glittering, but it wasn't bad either, at 10%.
On a valuation basis, however, the company's shares look a little rich. Media stocks have generally been trading at or near one-year highs lately, and AMC is no exception (it sells in the low $40s, not too far from its 12-month max of $46.69). Its forward P/E of 14.2 makes it pricier than Comcast with 13.7, Disney (NYSE: DIS) at 13.6, and especially Time Warner (9.9).
Meanwhile, its business is smaller, less diversified, and more limited. In the TV sphere it operates just four channels; AMC, IFC, and Sundance Channel (both of which show quirky, offbeat series and feature films), and the female-oriented WE tv. It also operates a movie theater in New York City and a smallish film production company.
Contrast this with Disney, for example, which not only controls a barrelful of powerful IP assets such as its classic cartoon characters but runs a busy film studio, several big theme parks, and a score of TV channels, including broadcast big boy ABC. Or Time Warner, a sprawling entity with fingers in every imaginable type of media pie (TV, movies, magazines, radio, etc.).
Those companies also spit out fairly or very reliable dividends to their shareholders, in contrast to make-it-and-reinvest-it AMC. These range from Disney's 1.3% payout (or $0.60 annually per share) to Comcast's 2.2 ($0.65) to Time Warner's 2.9% ($1.04).
Do you believe in zombies?
So ultimately, it seems that despite AMC's impressive Q1 performance, its stock at current price levels is a buy only for those who think the channel can continue its current winning streak. It's going to have to pile on more shows like Mad Men or The Walking Dead to beat strong but less expensive competitors such as Disney and Time Warner.
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