Why is This Hedge Fund Betting Big on AMC Networks?

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.

AMC Networks (AMCX)

In its most recent 13F filing with the SEC, Luxor Capital reported a $235.8 million position in AMC Networks Inc. (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. as its shares have returned 11.0%. Interestingly, this appreciation is actually below the Pay TV industry’s average (35.9%), and most of the company’s competitors including: Time Warner Cable Inc. (NYSE:TWC) at 46.6%, Comcast Corporation (NASDAQ:CMCSA) at 49.9%, DIRECTV (NASDAQ:DTV) at 22.4%, Liberty Global Inc. (NASDAQ:LBTYA) at 38.6%, Virgin Media Inc. (NASDAQ:VMED) at 41.8%, and Cablevision Systems Corporation (NYSE:CVC) at 15.9%.

In its most recent earnings release, AMC Networks reported impressive second quarter results, including year-over-year EPS growth of 51.3% with earnings of 59 cents a share. This trumped the Street’s estimates by 3.5%, as the company cited better than expected “advertiser demand and renewals with distributors” as the primary drivers behind this growth.

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 51.0% is greater than the likes of Time Warner Cable (46.6%), Comcast (41.1%), and Cablevision (-12.6%), but below Virgin Media (1,211.1%) and 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 both DIRECTV (0.94) and Virgin Media (0.20). Additionally, it’s 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 most ways you slice it. 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), Virgin Media (26.3X), 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.

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