What happened
After initially getting spooked by an analyst downgrade, investors flocked back to buy shares of cable and streaming TV company AMC Networks(NASDAQ: AMCX), sending the shares up 2% through 1:20 p.m. ET.
The streaming company, best known for airing such hit series as Breaking Bad, Mad Men, and The Walking Dead, got hit with a downgrade to underweight (i.e., sell) by investment bank Morgan Stanley this morning. That explains why the stock sold off early today.
But why are investors now buying AMC stock back?
So what
Like many of its peers, AMC has been shifting its business to emphasize direct-to-consumer streaming through devices such as Roku. In its note this morning, however, covered on StreetInsider.com, Morgan Stanley zeroed in on legacy cable concerns from cord-cutting by cable subscribers.
"Industry cord-cutting trends continue to worsen," warned Morgan Stanley, creating "greater downside risks on the revenue outlook across both linear affiliate fees and linear advertising." In the analysts' view, earnings before interest, taxes, depreciation, and amortization (EBITDA), even adjusted for one-time items, will shrink by as much as 10% annually over the next three years -- falling twice as fast as previously projected.
Crunching the numbers, Morgan Stanley calculates that this makes AMC Networks stock worth closer to $12 per share than the $19 per share it previously valued the stock at.
Now what
At a valuation of about 18 times trailing free cash flow, AMC Networks is hardly the most expensive stock on the market today. That being said, the shares already cost about $11 and change, so a $12 price target implies there's really not a whole lot of upside in this stock.
Furthermore, AMC Networks pays no dividend. Maybe an investor would consider investing in AMC if the stock were at least growing earnings, but most analysts agree with Morgan Stanley that AMC's earnings will be generally falling, not growing, over the next five years.
All things considered, there seem to be precious few good reasons to own this stock right now. If you ask me, investors were right about this one the first time -- when they were selling AMC stock this morning.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
