AMC's Killer Content Comes at Too High a Price


There is no doubting that AMC Networks has been on a roll lately. The cable company's current breadwinner, The Walking Dead, is driving unbelievable numbers from the most sought-after demographic: ages 18 to 49. With other highly valuable titles coming up for their final and penultimate seasons, things don't look to be slowing down anytime soon. But with a rich valuation and some eyebrow-raising ideas coming from management, should AMC be on your stock shopping list?

Killin' it!
First off, I think AMC is a very well run company that has done a phenomenal job rebranding itself and attracting best-in-class programming and showrunners. Management wisely cuddled up with Netflix to offer early seasons of its big-draw shows on the streaming content provider -- a move that many believe has driven the consistently record-breaking season premiers. The Walking Dead just had its second-half season premiere, and it drew 12.3 million viewers -- easily topping the previous record (season three's first-half premiere) of 10.9 million. It was the strongest telecast for a series in basic cable history for the 18-to-49 demographic, drawing in 7.7 million of the late-teenagers through midlife-crisis-ers.

The show went head-to-head with other powerhouse shows: Modern Family, The Big Bang Theory, Two and a Half Men, 80-year-old-women-perennial-favorite NCIS, and even the seemingly unstoppable Duck Dynasty.

In the business where content is king, AMC looks like royalty.

Mad king?
According to various reports, AMC management is considering switching The Walking Dead over to its sister channel, IFC. IFC doesn't get near the ratings AMC does, though it does have some interesting shows (Portlandia has been a hit among young adults). The company is thinking that pulling its top show from AMC to IFC is a way to boost ratings and raise the channel's awareness. I find this to be a terrible idea.

Switching The Walking Dead will cannibalize those beautiful ratings that AMC has been bathing in the last several quarters. It will confuse loyal show fans, who will wonder if something has changed. It will anger advertisers. If you can't tell, I don't think they should do this.

It's just a discussion, assures management, and other ideas include airing reruns of the show on IFC or airing first-run episodes simultaneously on AMC and IFC. But, with previous seasons available on Netflix, I don't see how this will be a big boost to IFC at all. Will someone please not let them go with option No. 1?

Let's talk numbers
Assuming management realizes moving The Walking Dead to IFC is the worst idea ever, the company should continue to do well through at least the next couple of years. Mad Men, which the company co-owns with Lions Gate Films, is sailing into its second-to-last season. The final season should be a ratings champion. Breaking Bad is likely to sizzle as well, with its fifth and final season airing in mid-July of this year.

Unfortunately, with all of these fancy properties comes a fancy price: AMC trades at 28 times trailing earnings and nearly 19 times forward one-year earnings. Now, that's not as rich as streaming champ Netflix, which trades at an absurd 70 times forward earnings, but it's a sharp premium to traditional cable networks. Premium content provider Starz, though ad-revenue free, generates plenty of cash and just signed a huge deal with Sony for top-tier content. Starz trades at just 11 times forward earnings.

For AMC to justify its price, The Walking Dead will have to keep shattering records for the rest of its life (which would have to be several more seasons) and keep convincing advertisers to shell out more cash. In addition, the programming director will have to come up with more shows to follow that are just as disruptive as the ones mentioned here. I'm not saying that cannot be done, but it's a serious "if" for investors looking to take a position at this point in time.

Though AMC is well run and has done a fantastic job in recent years, it is too rich for my taste. Investors may be better off looking at some cheaper peers.

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Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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