Is This Entertainment Company a Good Investment?

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Luxor Capital Group, managed by Christian Leone, is a New York-based hedge fund with an estimated $3 billion in assets under management. Founded in 2002, the fund has a relatively balanced structure, with holdings in equity and fixed income investments throughout the world. Aside from using a value-based approach when choosing its stocks, Leone’s Luxor Capital also has a penchant for distressed companies.

In its most recent 13F filing with the SEC, Luxor Capital reported a $235.8 million position in AMC Networks (NASDAQ: AMCX), good for 11.1% of the fund’s overall 13F portfolio. AMC Networks was Luxor’s second largest holding at the end of the first quarter (behind Express Scripts), and the fund increased its position in the cable television company by 27% in Q2, making it the fund’s new top dog, so to speak.

Since the start of 2012 AMC Networks has been a particularly good investment for Leone and Co.; interestingly, as you can see below, this growth is underperforming that of AMC’s competitors. 

<table> <tbody> <tr> <td> <p><strong>Company Name</strong></p> </td> <td> <p><strong>Share Appreciation During 2012</strong></p> </td> </tr> <tr> <td> <p>AMC Networks</p> </td> <td> <p>11%</p> </td> </tr> <tr> <td> <p><strong>Time Warner Cable <span class="ticker" data-id="209903">(NYSE: <a href="">TWC</a>)</span></strong></p> </td> <td> <p>46.6%</p> </td> </tr> <tr> <td> <p><strong>Comcast <span class="ticker" data-id="203139">(NASDAQ: <a href="">CMCSA</a>)</span></strong></p> </td> <td> <p>49.9%</p> </td> </tr> <tr> <td> <p><strong>DirecTV <span class="ticker" data-id="203347">(NASDAQ: <a href="">DTV</a>)</span></strong></p> </td> <td> <p>22.4%</p> </td> </tr> <tr> <td> <p><strong>Cablevision <span class="ticker" data-id="203249">(NYSE: <a href="">CVC</a>)</span></strong></p> </td> <td> <p>15.9%</p> </td> </tr> <tr> <td> <p>Industry Average</p> </td> <td> <p>35.9%</p> </td> </tr> </tbody> </table>

In its most recent earnings release, AMC Networks announced impressive second quarter results, including year-over-year EPS growth of 51.3% with earnings of $0.59 a share. This trumped the Street’s estimates by 3.5%, which the company said was due to better than expected “advertiser demand and renewals with distributors.”

Looking forward, these results place AMC Networks on track to reach its year-end EPS estimate of $2.19, up 10.8% from the $1.98 it reported in 2011. By the end of 2013, the company’s bottom line is expected to expand at an even quicker rate, rising 36.1% to an early consensus of $2.99 a share. This two-year estimated EPS growth of 46.9% is greater than the likes of Time Warner Cable (46.6%), Comcast (41.1%), and Cablevision (-12.6%), but below DirecTV (51.3%).

From a valuation standpoint, shares of AMC Networks appear to be fairly valued based on the company’s solid earnings outlook. Currently, they trade at PEG ratio of 1.16, below Comcast (1.33) and Cablevision (1.52), but above DirecTV (0.94). Additionally, its earnings growth valuation is on par with Time Warner Cable at 1.16.

From a cash flow standpoint, AMC Networks looks to be similarly valued compared to its competitors.  However, with a Price-to-Cash Flow ratio of 9.6X, the company’s cash hoard is trading at a premium to Time Warner Cable (8.8X), Cablevision (6.7X), though it is cheaper than Comcast (21.9X) and DirecTV (15.8X).

If AMC Networks can reach its year-ahead earnings forecast, double-digit appreciation is in the cards, and it is reassuring that the company doesn’t sport any price metrics that signal a massive overvaluation. Likewise, there doesn’t appear to be a huge value-play here, so investors must be aware that ongoing risks, such as its blackout saga with DISH Network, can push shares of AMC lower.

It appears the hedge fund industry is mixed over this company as well, with notable managers like John Paulson holding a position in AMC Networks worth a value near that of Christian Leone’s. On the other side of the coin, though, D.E. Shaw and Ken Griffin both decreased their holdings of the stock by more than 60% over the past quarter. For a complete look at hedge funds’ sentiment toward AMC Networks, continue reading here.

This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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