Today I will show a good value play, Starz (STRZA).
Summary:
Starz is a provider of premium video programming, offering films and original programming. It has been owend by Liberty Media Corporation, John Malone's media investment holding company. LMC spun itself off and the parent becomes Starz. After spinoff, Starz becomes a small-cap company and institution investors may have to sell their shares due to their limitation of market capitalization size. Thus, Starz currently offers very attractive valuation, earnings yield of 9.4%, FCF yield of 10.4%, and EBIT/EV of 16%. And spin-offs can historically offer better return. Starz has stable and rising subscriber base. It is also equipped with strong balance sheet and cash flow. Though original production is still in infancy, its CEO, Chris Albrecht has a lot of successful experiences in original programming and HBO. John Malone's track records and potential M&A target are also a plus.
Investment Rationale:
Prior to 2013, Starz is owned by Liberty Media Corporation, whose chairman is the well-known media dealmaker, John Malone. Starz is not really being spun off, which is a tricky part. During August 2012, Liberty Media decided to spin off Liberty Spinco, whose major business is the Old Liberty Media not associated with Star LLC. So, in reality, the original parent company, Liberty Media Corporation, changed its name to Starz, and the new Liberty Media (LMCA) became another separate public company. This spin-off finished on January 11, 2013.
To be honest, I don't know why Liberty Media spins itself off, not spin off Starz. Maybe it's about law or tax. So if anyone has any insight of this, I would very much like to hear.
Ok, this is the spin-off. Usually, spinoff creates a very good value play as institutional investors with market cap limit needs to sell the smaller spinoff. And more focused structure and strategies create higher value. But what about the company?
Starz is a provider of premium video programming. According to it 10K, Starz provides premium subscription video programming to U.S. MVPDs (Multichannel video programming distributor), including cable operators (such as Comcast and Time Warner Cable) , satellite television providers (such as DIRECTV and Dish Networks) and telecommunications companies (such as AT&T and Verizon). In addition to acquiring content from other media companies, Starz also produces its own original programming.
There are three business segments, Starz Networks, Starz Distribution, and Starz Animation. Starz Networks accounts for the largest proportion of business, 78% of sales in FY 2012. Starz Networks offers premium subscription video programming. Its generates revenue from distributors. People who subscribe Starz pay a fixed monthly fee to distributors, which then pay Starz based on the rate stipulated in the agreement. The agreements with distributors are generally multi-year ones and Starz can raise the rate based on CPI. So its revenue is stable, visible, and immune to inflation. Starz Networks are commercial-free.
Starz Networks offer three channels: Starz, Encore and MoviePlex. Offered contents include recently released and library films, along with original series. Starz has exclusive long-term agreements for films theatrically released with Sony (through 2021) and Disney (through 2015). It also has long-term agreements for older films with other major studios. Its original series include Spartacus and The Boss. Target group is those aged 25-54 with income of 50,000+ annually.
Starz's financial number is not fancy but stable. Top line grows only 3.6% annually from 2008 to 2012. But thanks to its stable programming costs, Starz is able to grow its operating income and bottom line. Its operating margin is quite satisfactory at around 25% for the past two years.
Number in thousands
Starz does not need a lot of capital to maintain its business as its programming and production can be paid by its operating activities. Basically, Starz is a cash cow. Its operating cash flow has exceeded net income. It has a debt of 540 million. Starz has a very good balance sheet. Based on its net income, it can pay off its debt within 2-3 years. Even if considering Starz still has to distribute a special dividend of 1.2 billion to New Liberty Media in 2013, Starz has sufficient ability to pay off this with its large cash of 749 million and ability to borrow. Furthermore, Starz has mentioned in its 10K that it intends to use its cash to buy back shares.
Based on its current number of outstanding shares, 120.2 million, Starz's earnings per share is 2.1 and FCF per share 2.3. Hence, based on its current price, Starz has a earnings yield of 9.4% and FCF yield of 10.4%. Turning out, Starz traded at only 10.54 times its 2012 EPS. On the other hand, its EBIT is 405 million while its enterprise value is 2,450 million. Its EBIT/EV is 16%. With stable business, visible revenue stream, strong cash flow, I believe Starz can make a satisfactory return at this price.
After looking at its financial numbers, let's turn to its management. Starz is currently led by Chris Albrecht, well-known in media industry. Albrecht joined Starz in 2010. He was the former chairman and CEO of HBO and worked for over 20 years. He is the man who transformed HBO and television landscape. HBO used to focus on movies. During his tenure in HBO, he has created several successful original series, including "Sex and the City," "The Sopranos," "Six Feet Under," "Deadwood," "Band of Brothers," “Curb Your Enthusiasm” and "Entourage." He is credited for the rising HBO. Right now, under his leadership, Starz has also developed many original series and is following the path of HBO.
Since Starz is following HBO's path, how is Starz compared to its competitors? In addition to HBO, Starz also compete with Showtime, owned by CBS. All of them offer premium TV and have the same business model. Business of Showtime and Starz is only in United States. Only HBO is aggressively expanding into other markets. In US, Showtime has the most number of subscribers, 76 million, followed by Starz, 56 million. HBO has 41 million subscribers in US but 73 million in other countries. Showtime is the clear leader in premium subscription service while Starz is trying to catch up.
| 2012 | 2011 | 2010 | 2009 | 2008 | |
| Starz | 56.0 | 52.8 | 51.0 | 47.5 | 49.4 |
| YoY | 3.2 | 1.8 | 3.5 | -1.9 | |
| HBO US | 41.0 | 39.5 | 39.4 | 41.0 | 40.9 |
| YoY | 1.5 | 0.1 | -1.6 | 0.1 | |
| Showtime | 76.0 | 73.0 | 67.1 | 61.3 | 58.7 |
| YoY | 3.0 | 5.9 | 5.8 | 2.6 |
As for the contents, there is not too much difference in film offerings, I believe, as all three networks sign output agreement with major studios. However, only Starz has no sports and boxing events broadcasting. And Starz's original series are still in infancy. Looking at the following table for currently or previously running original series:
Starz is still weak on original production. There are no hits yet and the number of production is much smaller than HBO and Showtime. The number of average viewers of Spartacus, so far the most successful series produced by Starz, can not be compared to like Game of Thrones, True Blood, Homeland, etc. This is not to say, however, that Starz is unable to produce top series. It needs talents, time and experiences. And don't forget that Starz has Chris Albrecht. You can not rule out that Staz will produce a hit like Game of Thrones.
Turning to valuation, as HBO and Showtime are owned by media conglomerates, it is hard to compare them to Starz, the only independent premium program service. Compared to other cable networks is still useful.
Clearly, Starz is cheap compared to Discovery, another John Malone's spinoff, and AMCX. Starz is even cheaper than the owners of HBO and Showtime. And it is reasonable to assume that HBO and Showtime should be traded at higher premium than their parents. Starz's business is not deteriorating and subscribers are increasing. Its balance sheet and cash flow are strong. This kind of valuation is attractive.
Furthermore, as mentioned, Starz is the currently only independent premium programming service provider. It is a potential target for large media conglomerates which would like to take a slice in premium programming. And this may be the reason why John Malone makes this spinoff.
Risks are the unproven production capability and the loss of subscribers. Currently, Starz still has stable and rising subscriber bases as it offers a competitive price with Showtime. However, if Starz can not produce more top series, it still runs the risk of losing subscribers. But with Chris Albrecht under the helm and the mild success of Spartacus, Starz should be able to gain more ground. And its price offers plenty margin of safety.
Disclosure: I hold the long position of STRZA.
nice writeup! Thanks for sharing
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