Shares of AMC Networks (Nasdaq: AMCX), the network behind the hit show “The Walking Dead,” have acted somewhat zombielike, falling 30 percent in 2016 – and drawing the attention of value-oriented investors.
The company’s third-quarter earnings results feature operating income down year over year, while critical advertising revenue for its national networks fell nearly 10 percent and restructuring expenses increased.
Think twice before assuming that AMC’s recent woes are a cause for long-term concern, though. Its management team is executing its strategic growth plan with precision. For example, AMC’s licensing and distribution revenue as a percentage of its total annual revenue is on the climb. Licensing and distribution revenue is considerably steadier than advertising revenue, which should help alleviate some of its cash flow volatility.
Also, AMC Networks has a healthy blend of successful programming and new content. Go-to programs such as “Mad Men” and “Breaking Bad” still bring in viewers, while its pipeline of new content is gradually rolling out, including shows such as “Preacher.” Some, however, worry about the decline in viewership for “The Walking Dead.”
With a forward-looking price-to-earnings (P/E) ratio in the single digits recently, the stock is an appealing portfolio candidate – especially if the company delivers another big hit. (The Motley Fool owns shares of and has recommended AMC Networks.)
Ask the Fool
Q: Does an annual report show how overvalued or undervalued a company’s stock is? – C.C., Madison, Indiana
A: Annual reports don’t focus on companies’ valuations. You can see what value the market is ascribing to a company via its market capitalization (or “market cap”).
You’ll find market caps online at sites that offer data on stocks. For example, click over to finance.yahoo.com, type in a company’s name or ticker symbol, and you’ll find its market cap. It’s arrived at by multiplying the current stock price by the number of shares outstanding.
A company’s intrinsic, or fair, value is harder to determine, and different smart analysts will have varying estimates based on different assumptions about the company’s growth prospects, among other things.
Still, it’s well worth reading the annual reports of any companies that interest you. If you’re a beginning investor, at least read the CEO’s letter to shareholders, which offers a sense of management character and the company’s strategic plan.
The financial statements are even more informative. The balance sheet reflects the company’s financial health at one point in time, including its cash, money it owes, money owed it, etc. The income statement (sometimes called the statement of operations) shows sales, costs and profits over a period of time, while the statement of cash flows will list all of the company’s cash inflows and outflows during the period. The more familiar you become with financial statements, the better you’ll understand companies.
Q: What’s the “big board”? – R.D., Knoxville, Tennessee
A: It’s a nickname for the New York Stock Exchange, America’s oldest exchange. It was founded in 1792 by 24 businessmen who gathered under a buttonwood tree on Wall Street in New York City.
My dumbest investment
A few years ago, I bought shares of Castlight Health, a software company focused on health care management, right after its initial public offering (IPO), for around $40 per share. The stock started falling, and I kept adding shares as it plunged. I figured that the more I averaged down, the less the stock would have to rise in order for me to break even. My average purchase price dropped to $21, but shares have been in the $3 range recently. It’s a lesson learned. I’ve built up my portfolio with better companies that make this holding seem insignificant. – D.R., Morristown, New Jersey
The Fool responds: Castlight has indeed been quite volatile. Part of the problem is that the stock started out overvalued – it debuted on the market priced at a valuation of about $1.4 billion – only a year or so after it posted just $13 million in annual revenue. Then the stock soared over 140 percent on its first trading day, reaching a market value of more than $3 billion. Clearly, the stock was way ahead of itself and likely to eventually fall closer to its intrinsic value.
IPOs are often disappointing investments, as they can soar at first, only to fall back to earth later. It’s best to give them a year or so to settle down. Averaging down is a risky move, too, as stocks often fall for good reasons.
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