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AMC Networks: A Stock Is Born

AMC Networks made its debut
on the NASDAQ stock exchange
last week, losing some
of the momentum it had built
up in “when-issued” trading but
mainly performing in line with
analysts’ expectations.

AMC, the former programming
arm of Cablevision Systems,
was successfully spun
off from the cable operation
on June 30 and officially began
trading on the NASDAQ July 1. AMC, which includes AMC
Network, WE tv, IFC, Sundance Channel and IFC Films, began
trading when-issued on June 15 at $35.49 per share and
rose 22.6% in the next two weeks, closing at $43.50 per share
on June 30. The stock fell about 8% on its first day of regular
way trading on July 1, closing at $39.85 per share

In subsequent trading, the stock has fluctuated slightly,
closing at $38.53 on July 5 (down 3.3% or $1.32 each), rising
to $38.78 (up 0.66% or 25 cents) on July 6.


The stock’s performance was a bit of a disappointment, given
its run-up during its “when-issued” phase, but when-issued
trading can be misleading. Shares in AMC increased about
9% on June 30, its last day of when-issued trading, mainly because
investors wanted to be in the stock before it began regular
way trading the next day.

“A lot of folks that were following the indexes wanted to be
in the stock before it began regular trading,” Collins Stewart
media analyst Tom Eagan said
of the June 30 run-up.

When-issued shares can be
bought or sold like ordinary
securities, except that transactions
do not settle until the
stock is formally issued. The
attraction: Trading in whenissued
shares usually requires
a small downpayment
of about 25% of the value of
the shares, and no margin or
loan debt is needed for the balance
until the settlement date,
which can be weeks in the future.

Some recent cable issues have traded at about half of their
when-issued price when first formally issued, but increased
in value as time progressed.
For example, Time Warner Cable
traded in the $40 range on a
when-issued basis in 2007, and
later was priced at about $29 per
share. It closed at $79.63 on July
6. Charter Communications traded
between $33 and $39.75 whenissued
and dipped to $35.50 per
share after opening at $38 each
on its first day of trading. Charter
closed at $58.98 per share on
July 6.

Miller Tabak media analyst David Joyce and BTIG Investors
media analyst Richard Greenfield both initiated coverage
on AMC with “buy” ratings just prior to the completion
of the spin, citing upside opportunities in greater advertising
revenue and affiliate fees and the possibility the channels
will eventually be sold.

Joyce, in a research note, stated that affiliate fees currently
represent about 57% of revenue at the AMC channel,
with advertising making up 37%, but that both should become
equal contributors over time. And he added that at
its current price, AMC is trading at a significant premium
to its peers — 16.7 times estimated 2011 cash flow, versus
an average of 9.8 times for its programming peers.

Joyce added that premium should be maintained, given
the takeover speculation that surrounds the assets and the
upside potential for affiliate and advertising fees.


Greenfield, in a June 28 research note, said that although
AMC will have to take on additional debt — about $2.4 billion
— it is expected to generate strong revenue and cash
flow growth to handle the additional load.

In a research note, Greenfield estimated that 2001 revenue
will rise 8.4% to $1.2 billion and cash flow will rise
11.7% to $448.2 million. By 2012, revenue should increase
9.7% to $1.3 billion and cash flow should rise 15.4%
to $517.1 million, according to
Greenfield’s estimates.

But not every analyst was as
bullish on the stock. Barclays
Capital media analyst Anthony
DiClemente warned that
AMC’s cable channels may
have already reached their affiliate-fee peak — he estimated
that AMC and WE tv are priced
25% above market, compared
to peers. And he worried that
many of AMC’s top shows —
like Mad Men, Breaking Bad and The Walking Dead
are owned by other companies, which could put AMC
at a disadvantage.