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 Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

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!