Analyst Downgrades AMC as ‘Walking Dead’ Slides

Nathanson says acclaimed originals mask reliance on repeats

Analyst Michael Nathanson of MoffettNathanson Research has put a “sell” recommendation on AMC Networks after the company said fourth-quarter ad revenue would be lower than Wall Street expected.

Nathanson said that AMC is too dependent on one series—The Walking Dead—and now that ratings are starting to erode for the zombie saga, the company has few places to turn to boost revenue.

Recalling how ABC crashed when Who Wants to Be a Millionaire ceased to be a sensation and how the decline of American Idol dragged down Fox, Nathanson said “AMC Networks is on the cusp of experiencing this type of chaos due to an over-reliance on The Walking Dead and appears to have few tools, except an outright sale, to save them from further multiple compression.”

While AMC Networks enjoys an enviable reputation for hit shows dating back to Mad Men and Breaking Bad, he says: “AMC’s acclaimed original series are masking two major structural problems: 1) All of their networks are dependent on repeat film and TV content which will remain casualties as live viewing continues to decline; and 2) The company is adding commercial inventory to offset GRP erosion, which is a time-honored trick that usually doesn’t end well.”

At the annual UBS Global Media and Communications Conference in New York Tuesday, AMC CEO Josh Sapan told investors that the company had been projecting a 5.5% ad revenue growth for the year. "We’ll probably come in closer to about 4%, due to some lightness against expectation of fourth-quarter delivery.”

Nathanson says that implies flat advertising revenue in the fourth quarter. And going forward, Nathanson expects advertising revenue to decline 4% annually over the next four years. The decline will put pressure on AMC’s profit margins, he adds.

For 2016, Nathanson is cutting his estimate for AMC earnings per share by 5 cents to $5.25. He’s also cutting his 2017 estimate by 7% to $5.55.

“The only logical way out of this situation is for the controlling owners (the Dolan Family) to quietly put these assets up for sale,” Nathanson concludes. “While there is inherent takeout risk to our [sell] call, we believe given the increasing likelihood of future negative earnings revisions, we think that any potential acquirer could purchase the company for a cheaper price down the road.”