Netflix Seeing Starz (You Should, Too)

Premium cable company Starz (NASDAQ: STRZA  ) is off to a fantastic start in its spinoff from parent Liberty Media. While some investors and analysts were frightened of competitor Netflix (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 -- and Showtime -- owned by 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 at 18.6 times forward earnings. Modest multiple correction brings the stock price up into the $23 to $25 range.

In a nutshell, that's why Starz is already a buy in my book. Monday's news, though, only further cements the company's status -- and its popularity among astute investors.

Sony sees Starz 
Monday saw a major upset to streaming champion Netflix's quest for content supremacy -- Starz re-signed a huge content deal with Sony (NYSE: SNE  ) that provides exclusive content to Starz through 2021. Netflix was largely anticipated to be at least a part of this deal, if not the only company involved.

As of this writing, financial terms were yet undisclosed, yet we can assume this is a deal similar to Netflix's estimated $300 million per annum to Disney. (Disney is currently under contract with Starz until 2016.)

With Sony's valuable properties, Starz will have a very competitive library for its Starz, Encore, Movieplex, and on-demand offerings. This allows Albrecht and his team to focus on original programming, which has great potential to drive growth going forward.

Swift boat
Even company chairman and Liberty CEO Greg Maffei admits that Starz is a great buy for a larger media company. With news of the Sony deal, I would not be surprised to see deal makers knocking on Starz's door in the near future.

The stock shot up to $17.91, or 7.44% higher than its closing on Friday. While this is unfortunate for some (I like my cheap companies to remain cheap as long as possible), there is still plenty of upside potential given my original thesis with the new bonus of Sony's catalog through 2021. Stock buyers interested in a relatively short investment horizon would do well to take a closer look at Starz before it's too late.

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  • Report this Comment On February 12, 2013, at 2:03 PM, dvena wrote:

    Hi Michael - Not sure why this is to be considered "a major upset to streaming champion Netflix's quest for content supremacy". Netflix has previously shown that they not only have an intimate knowledge of what content is worth, but they are unwilling to pay too high a price for that content - consider the Epix deal. With the detailed information that Netflix has regarding their subscribers and their viewing habits, they know what content will give them the most bang for their buck - always have. I find it a little short-sighted that you would consider it a "major upset" that a company is not willing to overpay for content. Just sayin... - Danny

  • Report this Comment On February 15, 2013, at 12:37 PM, pwlepp wrote:

    Even at $18.86 (current price) this is undervalued by at least 50% and probably more.

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