AMC Network shows promise for swift growth

If you’d like to make money in show business, consider investing in AMC Networks (Nasdaq: AMCX). AMC, once mainly a distributor of content, is now purchasing and/or producing it, with such critical and popular hits as “Mad Men,” “Breaking Bad,” “Better Call Saul” and “The Walking Dead.” It has profited by selling multiyear streaming rights to those programs and recently sold rights to its upcoming spinoff, “Fear the Walking Dead,” to Hulu.

Hulu’s purchase is wide-ranging and also includes future originals screening on AMC channels such as IFC and Sundance and on network partner BBC America, in which AMC has a 49.9 percent stake. The resulting windfall could last several years.

The international upside might be even greater. Right now, AMC gets just over 2 percent of its cash flow from overseas sales. As the ratio gets closer to 50-50 – and it likely will, because the international TV audience is far larger and AMC is doing more of its own international distribution – AMC should see revenue and earnings accelerate, driving its stock value higher.

AMC Network’s revenue has roughly doubled since 2011, and its net profit margins are in the teens, with revenue and net income growing by double digits over the past five years. With its P/E ratio in the teens, the stock is appealingly priced. (The Motley Fool recommends and owns shares of AMC Networks.)

Ask the Fool

Q: I recently noticed a company post quarterly results that featured earnings growing faster than revenue. Shouldn’t those two items grow at a similar rate? – W.A., Wilmington, Delaware

A: Not necessarily. Revenue (or “sales”) is the top line of the income statement and earnings (or “net income”) the bottom, with a lot happening in between. If a company’s revenue holds steady over a few years, but it adds workers or factories, or spends more on advertising, its expenses will rise and its profits will shrink. When you see a company’s earnings growing faster than its revenue, that suggests it’s becoming more efficient and its profit margin is increasing.

Q: A company I’m invested in wants to issue more stock. Should I vote for or against that? – F.B., Miamisburg, Ohio

A: Some would automatically vote no, because adding more stock can dilute the value of existing shares.

But consider why the company is issuing more shares. Sometimes it’s just to facilitate a stock split or for employee stock options. If the additional shares are to buy another company in a well-structured deal, adding them may be a smart move. Perhaps the acquisition will add much more in value to your company than it’s costing in additional shares. If a company uses the money raised to grow its business effectively, shareholders can still win.

My dumbest investment

My investment club once had a member who liked to gamble with his personal investing money. He had been pumping all of his money, around $30,000, into a large trucking company, and that was his only investment before joining our club. It had been close to bankruptcy, and he was sure it had nowhere to go but up. He hounded the club about buying shares, and after a few months we caved just to shut him up.

At that time, it was a penny stock, trading around $0.50 per share. A few days after buying it, the stock jumped 25 percent and the following day it dropped about 28 percent. We had a stop order in place, calling for an automatic sale if the shares fell 25 percent, so that kicked us out of them. We only lost a few dollars, but it is the dumbest investment because we caved and bought a stock that only one member wanted. It was a small cost for a big lesson. – J.R., Anaheim, California

The Fool responds: That company is saddled with a pile of debt and has been losing money for years, making it a risky proposition. Buying is fine if your research suggests a company is likely to grow, but buying to shut someone up isn’t a great path to profits. (It was risky for him to have all his money in one stock, too.)