Ratings Slide for ‘Dead’ Could Cut AMC Ad Sales

Analyst Nathanson asks if stock will turn into a zombie

Analyst Michael Nathanson of MoffettNathanson Research has lowered his estimate for advertising revenues at AMC Networks because of a pattern of declining ratings of its original shows, including The Walking Dead.

The Waling Dead (and its ratings declines beginning last season) fueled a narrative around future declines and the potential advertising death spiral to come,” Nathanson said in a note Tuesday. “This narrative has only gained steam as the network has been unable to find a sustainable breakout hit to replace TWD.”

Nathanson recently lowered his earnings estimates for AMC in the second quarter, but “based on our analysis, we believe we were not conservative enough in our domestic advertising assumptions for AMC Networks in the back half of the year,” Nathanson said in a note Tuesday.

As the highest rated show on TV, having The Walking Dead has enabled AMC to push up ad prices to advertisers looking to reach a big audience. Even as its ratings plateaued, prices for spots on the show continued to rise and give the network leverage in negotiations with media buyers.

AMC’s ad revenues fluctuate based on when it runs its original programs, particularly those in its Walking Dead franchise.

“While the number of originals is largely comparable on flagship AMC Network for 3Q and 4Q, we believe that ratings erosion for both The Walking Dead and Fear the Walking Dead earlier this year cannot be ignored,” Nathanson said.

Nathanson now sees ad revenues flat in the third quarter and down 4% in the fourth quarter.

AMC has launched a buyback program to lower costs. But he still lowered his estimate for third-quarter earnings per share by 16 cents to $1.07, while leaving fourth-quarter EPS unchanged at $1.17.

Nathanson notes that these changes leave him below Wall Street estimates for the second half of 2016 and all of 2017.

As for the stock, Nathanson is neutral. He notes that AMC shares already trade at a fairly low valuation, limiting the downside. On the upside, he expects merger and acquisition chatter as media consolidation picks up steam. AMC will be one of the companies that answers the question: after the Lionsgate Starz merger, what’s next for John Malone?