You wouldn't know it to read the headlines, but Starz (NASDAQ:STRZA) has been one of 2015's better-performing niche-entertainment stocks.
Yet the run may be far from over. Starz, like peers AMC Networks (NASDAQ:AMCX), Lions Gate Entertainment (NYSE:LGF-A), and Netflix is investing heavily in original programming. Mila Kunis and Rob Zombie are teaming for the network's newest project, the horror-comedy Trapped.
According to the press release, the half-hour horror-comedy takes places over a single night in the home of a wealthy family under attack by a murderous cult. Kunis and Zombie will executive produce the series created and written by Joey Slamon, whose previous work includes co-producing Arrested Development.
The bright side of horror
Whether the series turns out to be a hit or not, what should matter to investors is how Starz is going about building its portfolio. Most new deals are for all rights, and Trapped is no exception.
"Starz retains all domestic and international multiplatform rights including television, home entertainment, and digital," the company said in its press release.
The deal comes as Starz prepares for the Halloween debut of Ash vs. Evil Dead, a TV companion to the beloved Evil Dead movie series that catapulted director Sam Raimi and actor Bruce Campbell to fame. They reunite for the new series, to which Starz also retains all rights.
With both series, Starz is aiming to cash in on the growing interest in the horror genre spawned by huge ratings for AMC's The Walking Dead. A summer spinoff, Fear the Walking Dead, started strong with over 10 million-plus live same-day viewers of the pilot, and then held at least six million for the remaining five episodes.
Starz CEO Chris Albrecht would love to get numbers like that for any of his network's original series. So far, only the crime drama Power and fantasy adventure series Outlander have a history of drawing more than 1 million-plus live same-day viewers.
"[I'm a] big admirer of AMC and the job that they do," S&P Capital IQ quotes Albrecht as saying in a transcript of comments made at Goldman Sachs' annual Communicopia conference last month.
An evil twin?
Some see how Starz is modeling AMC -- i.e., exploiting the horror genre, stockpiling original programming rights -- and presume there's truth to the rumor that the two will merge at some point. Albrecht addressed the murmurs at Communicopia.
Without specifically commenting on the prospects for a deal, Albrecht said that Liberty Media chief John Malone believes "there's some real value creation to be seen" in a combination. Fools may remember that Malone, Starz's largest shareholder, in February exchanged a chunk of his stake for newly issued shares of Lions Gate. He benefits heavily if there's a merger between the two. Malone's interests in AMC, if any, aren't clear.
For his part, Albrecht wouldn't speculate on the prospects for any merger. All he'd say is that there have been general talks with AMC and Lions Gate. "It's our job to talk about how we might better grow our business," Albrecht said at Communicopia.
Watching the numbers
That's a good sign, especially since Starz last reported double-digit revenue growth in the third quarter of 2013. Cash from operations has either barely budged or declined in every quarter since the fourth quarter of 2013, S&P Capital IQ reports. Returning growth to the company is sure to be a priority for investors.
In the meantime, it's important to point out that Starz isn't stagnant. Excess cash is being reinvested into programming that -- at least at a high level -- looks to be producing better than the licensed properties that defined the network's past. Gross margin has improved from under 40% in Q3 of 2013 to 50% in last year's Q4 and 45.7% in the June quarter.
Look for continued margin improvements when Starz reports earnings on Oct. 29. Analysts are also expecting $422.8 million in revenue and $0.61 in per-share earnings after adjusting for noncash and one-time items, S&P Capital IQ reports.