Time Warner owns HBO and Cinemax. If Time Warner chose to purchase Starz, it would reduce future competition and help top-line growth. Time Warner Cable Inc (NYSE:TWC) seems to be one step behind industry trends. If it doesn’t make a significant acquisition soon, then it’s growth potential will be limited.
On the other hand, Time Warner has a debt-to-equity ratio of 3.9. If Time Warner was to make an acquisition, it could impact the company’s ability to return capital to shareholders. Time Warner Cable Inc (NYSE:TWC) currently yields 2.30%, which investors appreciate.
Time Warner’s revenue and earnings continue to grow on an annual basis, as there have been no setbacks over the past five years. In the first quarter, revenue increased 6.60%, and earnings improved 5% year-over-year. The company’s consistency has led to stock price appreciation — Time Warner is up more than 15% year-to-date. Overall, whether or not Time Warner Cable Inc (NYSE:TWC) should consider this acquisition is debatable.
Regarding CBS Corporation (NYSE:CBS), it’s a highly strategic company always looking for quality content, and the balance street is strong. All that said, you should never invest in a stock based on acquisition speculation.
Conclusion
Starz (NASDAQ:STRZA) trades at 11 times earnings, whereas Netflix trades at 514 times earnings. Starz has more subscribers, it’s ahead of the original content curve, and it has stronger margins than Netflix, Inc. (NASDAQ:NFLX). Furthermore, Starz has won the confidence of Berkshire Hathaway and its leader is a proven winner. So, Starz currently offers a better value than Netflix.
On the other hand, Starz sports a high debt-to-equity ratio of 7.67 versus an industry average of 0.50. This high-leverage position substantially increases risks for investors as debt has the potential to impede growth. If a bear market presents itself, then the stock would likely lack resilience.
All factors considered, Starz (NASDAQ:STRZA) appears to be a good speculative play for now. If you only allocate a small percentage of your available capital to the stock, then you might have a win/win situation. If the stock appreciates, you have a small win. If the stock depreciates, then you didn’t risk too much and you will have an opportunity to buy more at lower prices.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix, Inc. (NASDAQ:NFLX).
The article Should You Follow the Starz? originally appeared on Fool.com.
Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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