There Are Fears AMC Networks Investors Won't Survive After 'The Walking Dead' Ends

Jefferies initiated AMC Networks Inc AMCX with Hold rating and $72 price target, and expressed concerns on over exposure to The Walking Dead (TWD) franchise. "In our view, it will be important for AMC to develop new hit programming in 2016, especially considering that The Walking Dead franchise could be nearing its peak as ratings have slipped ~8% in Season 6 (Live +SD)," analyst John Janedis wrote in a note to clients. Janedis continued: "The market is focused on AMC's programming slate as T.W.D. enters its 7th season in 4Q, viewing the franchise's eventual displacement as a risk - we est. T.W.D. will generate more than 25% of US adv. in '16. Overall, we believe that the network will carry up to 102 original drama episodes in '16, from 80 in '15, driven by the launch of 3 new originals and expanded episode orders of existing series." Given the higher CPMs (Cost Per Thousand) generated by originals, the analyst expects the lift in original hours will drive 7 percent growth in domestic advertising in '16, well ahead of AMCX's peer group. "Although we anticipate an increase in programming costs (+HSD), we expect that the National Net segment will maintain a stable margin in '16 (in line w/ mgmt. commentary)," Janedis highlighted. On a positive note, the analyst believes that "AMCX's networks are less exposed to sub declines than peers, particularly due to their relatively low cost of carriage and superior ratings trends. Further, as AMCX shifts toward owning more of its programming (vs. licensing) we believe it will benefit from expanding ancillary revenue streams (i.e. SVOD/ Int'l licensing)." Janedis said the company's international expansion is in early stages and could be a significant contributor in the long term. Meanwhile, the analyst sees advertising in the National Networks segment will decline about 4 percent in the first quarter due to 1 less episode of The Walking Dead / Talking Dead, and 2 less episodes of Better Call Saul vs 2015, as a portion of programming shifts into the second quarter. "Looking ahead to 2Q16, we expect 27% growth in advertising driven by 13 more original episodes than 2Q15, including extra episodes from The Walking Dead, Talking Dead, and Better Call Saul, in addition to 3 new original series. Further, we expect that 4Q will be pressured as the second season of Into the Badlands is not expected to launch until 2017 (season 1 aired in 4Q15)," Janedis noted. Notably, the analyst expects The Walking Dead franchise to generate more than $260 million in advertising revenue, or 26 percent of '16 estimated National Networks advertising revenue. The analyst expects first quarter EPS and revenue at $1.77 and $686 million, respectively. For 2016, Jefferies anticipates EPS of $5.73 and revenue of $2.769 billion. Janedis said the key risks for the company include high exposure to "The Walking Dead. The analyst also warned that margin expansion will be difficult as AMCX transitions to owning more content (vs. licensing). Shares of AMCX were down 1.33 percent at $63.01. The analyst said his $72 price target equates to 13 percent upside from current levels.