Hedge Funds Shooting for the Starz (STRZA)

Spin-off situations tend to be good investment opportunities, as smaller divisions of larger companies tend to be misunderstood and incorrectly valued initially. In addition, the divested company can better focus on its specific business, increasing returns for shareholders in the process. Initially, the spun-off stock may underperform, as investors who received the shares might not want to hold it; once this selling pressure is gone, however, the stock tends to outperform.

During the fourth quarter of 2013, many ‘hedgies’ increased their holdings in the Class A shares of Starz (NASDAQ:STRZA), including Murray Stahl of Horizon Asset Management (who owns 8.1 million shares and is the fourth largest shareholder), Jeffrey Gates of Gates Capital Management (3.8 million shares) and Steven Cohen of SAC Capital Advisors (1.6 million shares). Other investors bullish on the stock include Warren Buffett of Berkshire Hathaway (with 4.5 million shares, the fifth largest shareholder), David Shaw of D E Shaw (890,000 shares) and Mario Gabelli of GAMCO Investors (763,000 shares).

Starz (NASDAQ:STRZA) is a $3.6 billion market cap integrated global media and entertainment company with operating units that provide premium subscription video programming on domestic U.S. pay television channels (Starz Networks), global content distribution (Starz Distribution) and animated television and movie production (Starz Animation). Liberty Media Corp (NASDAQ:LMCA) spun-off Starz in January 2013 at $14 per share to better focus on its investments in other companies, including Barnes&Noble Inc. (NYSE:BKS), Live Nation Entertainment (NYSE:LYV) and Sirius XM Radio Inc. (NASDAQ:SIRI).

Since then, the stock has been a strong performer, more than doubling following its divestiture. Despite rising costs for television content amid intense competition from both traditional cable networks like HBO, owned by Time Warner Inc. (NYSE:TWX), and alternative competitors such as Netflix Inc. (NASDAQ:NFLX), Starz (NASDAQ:STRZA) has generated strong earnings, aided by prudent expense management and growth in subscribers, who are increasingly interested in its original programming. In addition, following its spin-off, there had been heightened speculation that Starz was looking to sell itself to a larger buyer with multiple cable networks that could better leverage Starz’s growing original content, although that chatter seems to have died down recently.

Relative to its peer group of cable and satellite companies, Starz (NASDAQ:STRZA) looks favorable on most metrics, including above-average profit margins, high return on invested capital, strong free cash flow generation and manageable debt levels. The only negative comparison is the company’s EBITDA margin of 25%, which is below the peer group median of 30%. Valuation-wise, the stock trades at a discount to its peer group on a forward P/E basis (15.4X vs. 18.9X for peers) but a modest premium on a forward EV/EBITDA basis (10.0X vs. 8.3X for peers).

With a pipeline of original series, growing distribution in international markets and strong cash flows (approximately $475 million of which will be used to repurchase shares, equal to 13% of its market cap), Starz (NASDAQ:STRZA) is well-positioned to continue investing in its own content and grow its subscriber base while generating attractive returns for shareholders. At the same time, continued success as a stand-alone entity would make the stock a more attractive acquisition candidate by larger players.

Disclosure: none

Recommended Reading:

Hedge Funds Interested in Cole Real Estate Investments (COLE)

Christian Leone is Bullish on Lamar Advertising Co (LAMR) and Raises Stake to 5%

Tom Brown’s Second Curve Capital Raises Its Stake in Meta Financial Group Inc. (CASH)

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!