Will Debt-Loaded AMC Networks Be a Value Trap or a Zombie Stock?

Known for producing the hit show 'The Walking Dead, this media company is inexpensive. But are shares a good buy, or will they eat investors alive?
By Chiradeep BasuMallick ,

Now that the first half of the year is over, stocks exhibiting sharp declines will garner a fair amount of attention.

AMC Networks (AMCX) - Get Report , popular for its zombie show "The Walking Dead," is in a slump, down more than 24% year-to-date.

And with a forward price-earnings ratio of less than 9 times, the stock looks like a bargain valuation. But don't be fooled.

With projected annual earnings-per-share growth over the next five years in the low single-digits, AMC Networks is an owner of five pay-television channels that is heavily dependent on one or two shows. In addition, the company's $3.01 billion debt is a massive risk, underlining a long-term sustenance challenge that it is struggling to overcome.

Avoid this mirage of value because there are better investments.

The attractive valuation argument doesn't really stand up to scrutiny.

For starters, the stock's forward P/E is a misleading number. Although it compares favorably to the figures for peers Comcast (17.10) and Walt Disney (DIS), a low forward P/E ratio can indicate depressed future earnings.

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A forward price-earnings-growth ratio is much better at nailing down the value of a stock. Using this metric, shows that AMC Network trades at a five-year expected PEG ratio of 3.05, far higher than Comcast (1.45) or Disney (1.72).

What is driving this movement? Anticipated poor earnings growth and its debt load.

Investors who buy the seemingly inexpensive stock are allowing themselves huge exposure to the company's loans.

Meanwhile, Comcast, Disney and Time Warner's debt accounts for less than 50% of its market value.

By another measure, the debt-equity ratio for AMC Networks is 33.1 times, making it far more leveraged than peers such as CBS, Discovery Communications and Viacom. The industry average is just 1.0.

Unless somebody rescues AMC Networks the way Comcast bought and saved the studio, this debt will continue to be a massive headache.

In addition, though everyone loved the company's shows "Better Call Saul" and "Into the Badlands," the company only has a few channels and a small number of shows, giving AMC Networks little room for error.

There is no guarantee that the company's shows will generate new audiences for the network and that network's line-up will exceed expectations.

So far, the company's bucket of new programming generated ratings that are about 50% below Morgan Stanley's forecast. Without successful shows, AMC Networks is walking on thin ice.

With one-third of its revenue coming from advertising, one-third from fees from pay-TV operators and one-third from licensing its shows to Netflix and others, relying on blockbusters carries big risks.

No wonder, the stock its 52-week low. Investors should avoid this stock.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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