Is AMC Networks (NSDQ: AMCX) a growth story with a happy ending? We think so, even though many doubt the company’s ability to grow in what is a cut-throat industry.

AMC Networks, spun off from Cablevision Systems Corp (NYSE: CVC) in mid-2011, is the smallest creator of original pay-TV dramas. But it’s also one of the most successful. In the past five years, AMC Channel’s The Walking Dead, Mad Men and Breaking Bad have created a buzz at water coolers across America. And the popularity of AMC’s hit shows now rivals those of giants HBO (owned by Time Warner), Showtime (owned by CBS) and FX (owned by Fox).

As AMC leverages the popularity of its three hit series, two of which will continue for another two seasons (Breaking Bad ends this year), it is expected to have one of the highest earnings growth rates in the media sector in 2013 and 2014.

Advertising revenue. AMC owns the AMC Channel and three other basic-cable TV channels, on which it sells ads. Ad revenue accounts for about 37 percent of total revenue and was up 16 percent in fourth-quarter 2012, with further growth expected in 2013. Close to 13 million viewers watched The Walking Dead in early March 2013, a cable TV record, and most were in the coveted 18-to-49 demographic.

Affiliate fees. These are per-subscriber fees the major pay-TV distributors pay to AMC to access its channels. These fees account for about 57 percent of revenue. AMC’s fees are relatively low because its main cable station, AMC, ranks 14th in overall popularity, and AMC’s three other stations are not in the top 35 (WE tv for women, and Sundance and IFC for independent film).

While distributors are under pressure to cut costs and drop unpopular channels, AMC is using the draw of its hit shows to: (1) get fee increases; and (2) block its less-popular channels from being dropped. So far this is working. The popularity of The Walking Dead was a factor in helping AMC resolve its legal dispute with Dish Network Corp (NSDQ: DISH) last October, when Dish finally agreed to carry all the AMC channels after removing them for four months. In the past year, AMC has signed new fee agreements with close to half of the major distributors, including Comcast, Dish Network, AT&T, Verizon and Rogers Communications.

Alternative distribution. AMC wholly owns The Walking Dead and can profit from online downloads, DVDs and eventual syndication. However, Mad Men and Breaking Bad are owned by Lionsgate and Sony, respectively. AMC is also building up its international distribution, currently in the development phase.

Serial Success

AMC’s stock is up about 70 percent since going public in 2011. But we think there could be more upside as 2013 earnings start to move up and some of AMC’s pilot shows launch, including Low Winter Sun, a police story set in Detroit. AMC is also focusing on boosting its Sundance Channel with original content, including the series Rectify.

Led by longtime CEO Josh Sapan, AMC has proved it can spot winning series passed up by the biggies (both HBO and FX passed on Mad Men and The Walking Dead). And AMC’s relatively small size, coupled with its growth prospects, make it a potential takeover target.