Sunday, April 13, 2014

With News of Berkshire Stake, Is Starz Still Attractive?

Pay-TV cable operator Starz (NASDAQ: STRZA  ) , a spinoff from media conglomerate Liberty Media (NASDAQ: LMCA  ) , has done nothing but climb since its market debut less than a year ago. This past month, the company reported its first-quarter earnings for 2013, and while the numbers came up short of analyst expectations, there was plenty of encouraging news for the long-term viability of the company. Just this past week, it was announced that Berkshire Hathaway had amassed a nearly 5% position in the company, gained as a result of the firm's sizable Liberty Media stake. The question now is, does the stock still have room to run, or is this growth story coming to an end?

Earnings recap
Missing analyst estimates, revenue dipped about 1% for the company to $399.3 million. But with both its namesake Starz network, as well as Encore, the company now has 56.7 million paying subscribers -- by far the largest of any premium cable operator. One of Starz's new series, Da Vinci's Demons, debuted to a record high for opening-weekend numbers, and has been renewed for a second season.

Still, the company's expenses and lowered sales kept the bottom line down. Operating income shrank 13% to $104.9 million, from $120 million in the year-ago quarter. On a per-share basis, the company earned $0.47, down from $0.65 one year ago. Analysts were expecting $0.49.

Management is sticking to its strategy of cautiously allocating capital toward original productions. Given the success of its recent series, and newly green-lit projects on the horizon, this remains a compelling strategy that should enhance shareholder value over the long term.

The future and valuation
After a more than 60% rise since its IPO, Starz is currently trading at 13 times one-year forward earnings. Direct comps are difficult, since Starz is the only independently traded premium-TV play, but we can look at others, owned by larger media companies, for guidance.

Time Warner (NYSE: TWX  ) owns HBO. While it is smaller than Starz by subscriber count, the network has a near-flawless record in its recent original productions. Titles such as Game of Thrones, Girls, and True Blood have been tremendous successes in attracting and retaining subscribers. Time Warner trades at 14.12 times forward earnings, but includes many other factors -- from film studio Warner Brothers to theme parks. Showtime parent CBS (NYSE: CBS  ) trades at just over 15 times earnings. All three networks have attractive economics as they have pushed original content that, though costly up front, creates better margins over time and saves the company from some difficult negotiations with other content providers. Recently, the company ended its contract with both Netflix and Disney, startling some investors and analysts but ultimately proving a wise decision as it freed up cash to put toward in-house production.

As mentioned, Berkshire's holding, which was not an open-market purchase but part of the spinoff from Liberty, is still intriguing as the conglomerate could have sold the stock upon receipt, but instead opted to keep it. All in all, Starz looks to remain fairly valued and an attractive long-term pick. I would not worry too much about the short-term dip on the financial statements.

Can Netflix fend off its burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

No comments:

Post a Comment