Starz (STRZA) Gazing: Time Warner Inc (TWX), CBS Corporation (CBS)

Shares of premium cable channel Starz (NASDAQ:STRZA) soared 31.2% through February 28 since hitting the market as a standalone entity on January 11, but the estimable upswing has stalled in recent weeks and the company’s first reported standalone earnings did little to reinvigorate the stock. That doesn’t necessarily mean the run is over, just that the newfound operational clarity deserves a thorough parsing to determine what the future holds for Starz (NASDAQ:STRZA) shares.

The company delivered $422 million in 4Q revenue, ahead of consensus estimates of $418 millon, and 2012 revenue of $1.63 billion, up slightly over the prior year. 2012 operating income dipped 3.9% YOY to $405 million primarily due to escalating programming and production/acquisition costs, and operating cash flow fell 16% to $292 million. 2012 net income did tally $252 million (+6.8%), and EPS of approximately $2.10 was ahead of estimates. But enough with the formalities: what really matters now is how Starz (NASDAQ:STRZA) is positioned for the future—and I believe it’s sitting pretty.

Starz (NASDAQ:STRZA) now counts 21.2 million Starz subscribers (+8% YOY) and 34.8 million Encore subscribers (+5%), a healthy base of 56 million through which it can leverage increases in affiliate fees going forward. By comparison, HBO and Time Warner Inc (NYSE:TWX)’s Cinemax together count approximately 41 million US subs and CBS Corporation (NYSE:CBS)’s Showtime approximately 22 million. Beyond sub counts, however, it’s difficult to directly compare the top US premium cable channels. HBO sits within Time Warner Inc (NYSE:TWX)’s networks business that includes cable channels such as TNT, TBS and truTV. The unit delivered revenue of $14.2 billion (+5.4%) and operating income of $4.7 billion (+6.9%) last year. Showtime joins with CBS Sports Network and Smithsonian Channel in powering CBS Corporation (NYSE:CBS)’s cable networks business, which notched 2012 revenue of $1.8 billion (+9.3%) and operating income of $785 million (+14.8%). Irrespective of the direct comparison problems, the cable networks business overall is marked by steady annual revenue increases on the affiliate side and a plethora of content licensing opportunities given the explosion of online viewing platforms.

Also important to Starz (NASDAQ:STRZA): several pay-TV operators have begun offering their customers STARZ PLAY and ENCORE PLAY, companion services that give subs of the linear channels free online access to content including 300 movies and 100 episodes of original series. The importance of this digital initiative cannot be understated. Time Warner Inc (NYSE:TWX) president/chief executive officer Jeff Bewkes has long raved about the customer loyalty such add-on services engender (read: subs receive more bang for their buck), and pay-TV operators love proffering similar value propositions to their own customer bases.

Also, Starz (NASDAQ:STRZA) recently inked a deal with Sony Pictures Entertainment that extends an exclusive first-run premium pay-TV deal for theatrical releases through 2021. Set to hit Starz channels this year are films including “Zero Dark Thirty,” “Men In Black 3,” and “The Amazing Spider-Man.” And even if Starz’ output deal with The Walt Disney Company (NYSE:DIS) is winding down, Starz maintains a first-rum window for Disney products such as new Marvel and Lucasfilm titles for its linear channels and digital services into 2017.