Horizon Kinetics 3Q17 – AMC Networks, Howard Hughes Corp

Smart Money

Horizon Kinetics 3rd Quarter Commentary, October 2017

AMC Networks

  • “Cord-Cutting,” “Skinny Bundles” and “OTT Offerings” are disrupting the traditional TV landscape
  • There are substantial implications for operators in the media sector, but as is often the case, perception often obfuscates reality, which can be very helpful for research-based value investors
  • Cord cutting refers to a cable subscriber foregoing a traditional subscription and the consumer is left with a variety of options to access video media, one of which is a skinny bundle. This refers to a cable package, offered either over the top (OTT) or via the traditional linear system, in which fewer channels are offered in the bundle compared to traditional packages. OTT refers to the ability to bypass the traditional time-linear cable subscription and instead consume video via a streaming internet feed at a time of your choosing
  • Due to confusion and lack of clear understanding among consumers and investors, traditional media companies, which used to trade at material valuation premiums to the broader market, now trade at a median 13x earnings, or about 40% cheaper than the S&P 500
    • Some companies are better positioned than others, as exemplified by AMC Networks (AMCX)
  • AMC’s primary business is providing TV programming via five national networks, including its flagship AMC channel, IFC and SundanceTV
    • Earns revenue relatively equally from advertisers and the affiliate fees that cable companies pay to carry the company’s networks (driven by viewership rates and number of subscriptions)
  • Headlines imply that as more consumers forgo traditional cable subscriptions, companies like AMC will lose subscribers, impacting affiliate fees, hence, viewership and advertising fees
    • As a result, trades at ~8.5x earnings, 35% cheaper than other media companies and 60% cheaper than S&P 500; trades at less than 12x FCF
  • At the company’s National Network division, which accounts for over 80% of sales, revenues increased by 5.6% in the June quarter and operating income rose by 12%
    • AMC was able to achieve these overall results despite the “ravages of cord cutting” because of the value of its primary asset: content
  • Has amongst the highest rated and viewed primetime shows on cable television, which enables it to negotiate higher distribution fees and advertising revenue
  • Only having five channels is a further advantage; carriage of these channels is far less burdensome than is carriage of many larger, competing networks that try to include over a dozen channels
    • AMC’s sought-after content is actually resulting in stronger results despite weaker industry backdrop
  • Content is the key variable with all media companies (other than distributors), and if consumers demand specific content it will be valuable. Economics of original content in a world in which more consumers access content via OTT offerings and/or skinny bundles is yet to be determined, but AMC appears well positioned
    • Has control of long-term contracts covering much of their original content library and production. Should be able to continue to monetize these assets for many years to come, across various media platforms
  • Shares trade at 12x FCF despite no contribution from AMC’s international division, which accounts for about 17% of revenues. International cable division was largely acquired recently, with the strategic notion that AMC could extend the commercial reach – mostly into Europe – of content it already produces. That could be very profitable but this requires a certain amount of time to market and to attain a certain degree of scale
  • AMC has a market value of ~$3.5Bn, which is well below the size needed for most major index ETFs. In a single week, Disney shares trade $3.5Bn of volume, equivalent to the entire market cap of AMC (Disney has a $150Bn market cap)
  • Dolan family, which operates AMC, owns nearly 20% of the company’s shares, so the float is that much lower. As well, they have majority voting control, so the company can’t be acquired without their say-so
  • Current valuation appears to have little to do with practical financial or economic factors; as a result, company is dedicating a large portion of FCF to share repurchases, and has bought back 12% of its shares since year-end 2015

Howard Hughes Corp

  • The Howard Hughes Corp (HHC) as it exists today was conceived in 2010 as a spinoff from General Growth Properties (part of General Growth Properties’ bankruptcy reorganization)
  • Although the company has been publicly traded for seven years, it might still be characterized as misunderstood
  • Even though it has been successful in developing and improving the economic value of its portfolio of real estate, it shows very little in terms of net earnings
  • More recently, shares fell in the period leading up to and following Harvey’s landfall in the Houston area, while S&P 500 and Vanguard REIT ETF rose
    • Appears that many assumed that the extensive HHC master planned community operations in the Houston area, namely Woodlands and Bridgeland, would be negatively impacted by the storm
    • As it turns out, HHC issued a press release several days after the storm reporting only minor damage, that all of their assets were fully operational
    • Of course, long-term value of these assets is inextricably linked to the health of the Houston area economy; it does not appear that the growth of the area will be halted indefinitely although it will be more sluggish during the rebuilding effort
  • Broader issue is this: the Houston properties comprise only one of several of the company’s major assets. These are geographically diversified across the US, and even if one removed the Houston assets entirely, one could easily justify the company’s current market value
  • Our assessment of main asset bases and their fair value:
    • South Street Seaport, Manhattan, NY: $2.5-3.0 billion
    • Houston Assets, Houston, TX: $4.25 billion
    • Summerlin, Las Vegas, NV: $2.5 billion
    • Columbia, MD: $570 million
    • Ward Village, Honolulu, HI: $2.5 billion
    • Other properties: $480 million
    • Recent market cap for HHC: $5.3 billion
  • It is incumbent on investors to monitor news affecting their holdings but it is crucial that a new bit of information be evaluated within the context of the investment thesis
    • Will this news have a long-term impact on the value of the company?
    • In the case of HHC, share price quickly recovered following the storm, though it remains below highs achieved when oil prices were higher
    • Latter reaction is, perhaps, another example of availability bias, making decisions on the basis of information that is more recently recalled or memorable

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