Premium cable business Starz (STRZA) has been a runaway success since its spinoff from Liberty Media in the first few days of 2013. The company has seen subscriber counts grow and grow -- further cementing its position as the largest premium cable operator. In its recent earnings report, Starz put out higher numbers across the board, with encouraging viewer figures in its latest projects and strong international territory penetration. The company has a great management team with a strong focus on original programming. While the cable industry at large faces intense disruption, this premium television play continues to impress.
Earnings recap
The two channels under Starz's control, Starz and Encore, saw memberships rise by 6% and 2%, respectively, in the company's third quarter. Starz hit 22 million, while Encore rose to 35 million. As mentioned above, the combined 57 million subscriber base is the leader in the premium TV industry.
Financially, things looked strong as well. Revenue climbed 11% to $446.1 million, while adjusted OIBDA (operating income before depreciation and amortization) climbed up 5% to $113.7 million. Net income actually declined 7% year over year due to rising costs, but it doesn't look like a trend that will continue into subsequent periods.
On the original programming front, the company appears to be putting the pedal down on new series, including a Michael Bay-helmed Treasure Island prequel series called Black Sails and a drama starring Owen Wilson. Though recently challenged by cable outperformer AMC Networks, the premium cable operators have had consistently superior original content -- bringing in more and more subscribers over the years. Time Warner's HBO, CBS' Showtime, and Starz are the three leaders in the space, each pushing further and further into the original programming arena to insulate themselves from the competition.
In a time where Internet streaming companies can pick off cable subscribers one by one with relative ease, original programming is becoming ever more important. Supplementing the shows will be the traditional territory of these premium networks: first-run feature films.
On a financial and operational level, Starz has performed exceptionally. With a major gain in stock price since its market debut, though, is the stock still worthwhile?
Valuation
Starz trades around 14.5 times its forward anticipated earnings. Since it's the only pure play on premium TV, comps are not exact but still useful. Time Warner trades at 15.8 times earnings, though it is a much more diversified business beyond television. CBS, growing its cable network sales by 37% in the most recent quarter, trades at about 16.7 times its 2014 earnings estimate of $3.52.
Starz, obviously on the low end of the three, isn't set to grow like CBS is, but is arguably in better shape than Time Warner -- a company with heavy-in-the-belly assets such as Warner Brothers Studios and Time magazine.
Given the company's strong operating results, attractive future and reasonable forward valuation, Starz remains a compelling premium television pick for investors.
