Premium cable company Starz (NASDAQ:STRZA) is off to a fantastic start in its spinoff from parent Liberty Media Corp (NASDAQ:LMCAD). While some investors and analysts were frightened of competitor Netflix, Inc. (NASDAQ:NFLX) overpowering the company in the deals department, on Monday Starz showed that it, too, could make big-time profitable deals with the biggest content providers. Unfortunately for value hunters, the stock rocketed up as high as 8% in Monday’s trading — erasing some of the value appeal. But for those interested, fear not, there is still time to get in on this great pick.
Rewind
It hasn’t been long since I last wrote about Starz — just a few weeks, actually. At the end of January I wrote my thesis for a long position in the company based on acquisition potential coupled with strong growth prospects and multiple correction. I don’t want to be a broken record on this one, but it’s a stock that needs attention now — not later. While many value deals can sit and gestate for months before requiring action, I believe Starz will soon attract substantial attention from analysts, pundits, and money managers. Really, it’s already under way. Steve Cohen of SAC Capital picked up more than 5% of outstanding shares at the end of January; value guru Jeffrey Gates snatched another 5% around the same time. With two very talented fund managers making up for 10% of outstanding shares, investors should recognize the potential here.
Without rehashing my previous article, let’s outline Starz’s merits as an investment, not including Monday’s news.
Merits
Starz is the only pay-TV offering not owned by a larger conglomerate. The company’s closest peers are HBO — owned by Time Warner Inc. (NYSE:TWX) — and Showtime — owned by CBS Corporation (NYSE:CBS). This suggests a couple of things:
1). This is a one-of-a-kind, high-moat business that is in demand — from consumers and large corporations alike.
2). Piggybacking on No. 1, this company is in prime position for a buyout from a major corporation and likely at a steep premium to its IPO price.
As we know, though, Wall Street can hold more rumors than a locker room full of 13-year-olds. The thesis can’t rely solely on hopes of an acquisition. Luckily for Starz, it has a backup plan — it’s a great business anyway. The company creates premium content, not only in price, but quality as well. If you watch any of the programming on pay-TV options out there, you are well aware of the substantial difference between average network shows and the movie-like sagas of premium cable. Former HBO original programming swami Chris Albrecht is Starz’s chief exec. Albrecht brought some of HBO’s best programming to air and has already started a similar path at Starz.
Before Monday’s gains, the company traded at nine times forward earnings. There is no reason that the company should trade at substantially lower multiples to peers such as Time Warner at 14 times forward earnings or AMC Networks Inc (NASDAQ:AMCX) at 18.6 times forward earnings. Modest multiple correction brings the stock price up into the $23 to $25 range.
