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Bruce Frey's Analyst Insights

InvestorsObserver
Options Analyst Writer
Bruce E. Frey II
Author Bio


December 10, 2012 - AMC Networks Demonstrate Strength of Original Programming

A typical year-end review involves taking a look at decisions made earlier in the year and reviewing the results in order to improve the decision making process in the future. As I was performing this review I found one of the more interesting stories from this past year. It involved a major entertainment distributor, a minor entertainment provider, a lawsuit and contract negotiations.

Like many other viewers, I enjoy AMC Networks (AMCX) original programming and I am particularly fond of the "Breaking Bad" series. Unfortunately for me, I am also a Dish Network (DISH) subscriber and was unable to view the most recent season since Dish and AMC were embroiled in a complicated legal dispute and contract negotiation which resulted in Dish dropping AMC programming prior to the season premier of "Breaking Bad".

The case involved the failed Voom HD venture between Dish and Cablevision (CVC). The litigation started way back in 2008 when Dish pulled Voom HD channels off its service. The programming on Voom consisted of high-definition shows provided by Rainbow Media Holdings, a subsidiary of Cablevision. In July of 2011, Cablevision spun Rainbow Media Holdings off as AMC Networks. Subsequent to the spin-off, AMC networks entered contract negotiations with Dish and attempted to raise rates for its programming.

The combination of the lawsuit and the dropping of AMC programs from DISH over carriage rates were the backdrop for me to suggest a bull-put trade on AMC. The original trade, as presented in my July 30 article, called for a September 35/40 bull put spread. To enter the trade you would have bought the September 35 put and simultaneously sold an equal number of September 40 puts for a 50 cent credit.

The day the article was published AMC Networks traded in the low $40's meaning the stock would have had to fall over 8.1% before the position was in any danger. While the trade was open the stock hit a high of $45.09 before dropping to a low of $37.47 then rising to close at $42.62 on expiration day in September. Since the stock was above our sold put strike price of $40 we realized a full profit on the trade. By comparison, if you were long the stock during the same time frame you would have lost around 50 cents per share.

Since our trade closed, AMC Networks has resolved their issues with Dish Networks and AMC programs are once again available for my viewing pleasure, and everyone else's too I suppose. Shares of AMC Networks are up some 23% since September expiration mostly on the strength of its award-winning programming.

The potentially huge payout from the suit, estimated to be as high as $3.5 billion, did not materialize, and the overall impact should be positive for both companies moving forward. Dish agreed to pay $700 million in cash to AMC Networks, and in turn will receive licenses for wireless multichannel video distribution and data service in 45 markets, including New York, Los Angeles, Chicago, San Francisco and Philadelphia. Under a separate multiyear agreement, Dish agreed to resume broadcasting the AMC family of channels in full on November 1.

With high quality original programming like "Breaking Bad", "Mad Men" and "The Walking Dead", AMC Networks has built a strong base for its entire network of channels. This presents a problem for cable and satellite companies since AMC's other networks include WE TV, a network aimed at women, featuring shows such as "Bridezillas" and "Obsessed with the Dress." Also in the AMC family, IFC airs "Portlandia" and R. Kelly's "Trapped in the Closet." Both of these networks receive low ratings but are bundled with the flagship AMC channel.

The bundling of high- and low-rated programming will likely lead to difficult when contracts with programming distributers like Dish, DirecTV (DTV) and Time Warner Cable (TWC) are renewed. As a matter of fact, Time Warner and AMC are working through the renewal process right now and Time Warner, like Dish, is threatening to drop AMC Channels from its line-up.

 

The legal process may hamper AMC's stock value in the next few months but are not seen as a serious threat to the long term trend. Investors looking for a trade on AMC Networks may want to consider a March 40/45 bull put spread. In this trade you would buy the March 40 puts while selling an equal number of March 45 puts for a net credit of 45 cents. The trade will generate a very nice return of 9.9% (37.6% annualized) as long as the stock does not fall more than 14%.

Be certain you fully understand the risk and reward profile of a trade before you put your hard-earned cash to work. If you have comments, concerns, praises or criticisms, please e-mail me at bfrey@InvestorsObserver.com.

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