Goldman Sachs Steps To The Sidelines On AMC Networks, Cites Declining Ratings For 'The Walking Dead'

The recent rally in media stocks helped push shares of AMC Networks Inc AMCX higher. With minimal upside potential ahead, however, the bullish case for owning the stock no longer applies, according to Goldman Sachs.

The Analyst

Goldman Sachs' Drew Borst downgraded AMC Networks from Buy to Neutral with an unchanged $70 price target.

The Thesis

AMC's hit show 'The Walking Dead' was the No. 1 rated non-sports TV program among the 18 to 49 demographic group for four straight years, Borst said in a note. This impressive trend could come to an end in 2018, however, given poor trends in the show's ratings and the strength of NBC's rival show 'This Is Us." Unfortunately, once any popular show starts declining in popularity the decline in interest "rarely stopped" until it's forced into cancellation.

As such, AMC may no longer be able to attract top advertising dollar for a top-rated show which doesn't bode well for the company as U.S. advertising accounts for 41 percent of total EBITDA, the analyst wrote. The company's total domestic advertising revenue could fall by 3 percent on average through 2020 amid continued declines in "The Walking Dead" but the rate of decline could be even worse if new TV shows in the pipeline under perform versus expectations.

Borst said AMC's stock may look "cheap" at 8 times P/E versus a historical average of 14 times since 2011. But the lower valuation merely represents a "new normal for the stock" as peak valuation occurred in a "vastly different environment" where cord-cutting trends were in its early stages.

Price Action

Shares of AMC Networks were trading lower by 2.3 percent Tuesday at $63.25.

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