Starz Remains Undervalued; 'Outlander' Is Latest Show To Demonstrate Original Programming Transformation

| About: Starz (STRZA)


"Outlander" viewership is strong. The show has been renewed for second season, and shows massive series opportunity.

Starz' transition to original programming continues, and the company has a strong library.

Shares trade with attractive price-to-earnings ratios on a current and forward basis.

Starz (NASDAQ:STRZA) was one of my picks for 2014 in my annual top ten list. Since that time, the company has continued its transformation into an original programming powerhouse and launched shows that are breaking records with women and African-Americans. Despite the strong performance of ratings and revenue, shares of Starz are up only 3% on the year. Investors should consider investing in this wonderful media company.

I last recommended shares of Starz on July 8th. The highlight of that article was the television adaptation of "American Gods", a bestselling novel. That article also had this bullet point, "shift of focus to also appealing to women providing strong numbers, will help upcoming lineup."

On August 9th, Starz debuted its newest hit show and possible number one franchise. "Outlander" is the company's new show, based off of a bestselling book series of the same name. The first season will be 16 episodes.

The premiere episode saw huge viewership of 5 million across all platforms. More surprising, the episode saw equal viewership among men and women. I say surprising because I highlighted how the show could help boost the appeal of the channel to women, after once being known as the home of violent male driven shows like "Spartacus". The show was also a hit on Twitter where the show was the number one rated television show (by Nielsen) in conversation volume during its premiere night.

"Outlander" has already been renewed for a second season. The second season will be at least 13 episodes and will center on the second book in the series titled "Dragonfly in Amber" by Diana Gabaldon.

Here's where investors should be excited and see the franchise potential. There are now eight books in the Outlander series, with the latest one published in 2014. A ninth book is already in the works. The comparisons to "Game of Thrones" may pop into your head, as each one of those seasons follows a book in the series. Starz has already spoke of their desire to make each book into a season for the show, which could keep Outlander on the air for more than 10 years.

The popularity of the show has also helped boost book sales, which will likely help keep the franchise popular as additional books are released. The original novel, which was published in 1991, reached number five on the USA Today's Bestselling list, its highest chart position ever. The newest book "Written in My Own Heart's Blood" peaked at number two on the bestsellers list this year. In total, more than 25 million books in the series have been sold.

Along with "Outlander", Starz has other hit original shows performing well and several exciting projects coming up. "Power", produced by 50 Cent, averaged 4 million viewers a week during its first season. Impressively, the series saw its finale viewership double its premiere episode. That show continues to show strong viewership numbers for African Americans and trails only the most viewed shows across the nation for African American viewership.

"The White Queen" helped give Starz the female audience it was after. "Black Sails" helped revive some of the fans that were missing "Spartacus". The pirate themed show saw average viewership of 5 million per week. Investors and shareholders will be happy to know that executive producers are already pitching season three of "Black Sails". The show is shaping up to be a strong franchise for Starz. "Da Vinci's Demons" also has performed well and is entering season three.

I highlighted other upcoming shows in my last article including "The Chair", "American Gods", and "Flesh and Bone". Since that article, the company also added "The Missing" to the lineup, a limited series of eight episodes that will air beginning November 15th.

If you add it all up, Starz now has huge franchises that include:

  • "Outlander"
  • "The White Queen"
  • "Black Sails"
  • "Da Vinci's Demons"
  • "Power"

The future slate includes a couple shows that could also become franchises for Starz as well.

Another interesting item from the recent earnings call is the fact that "Spartacus" was signed to two distribution agreements that will help future revenue. The show was launched on Syfy recently and will also see distribution in Germany via Amazon Instant Video. The important item here is the Syfy deal was non-exclusive, meaning Starz can keep shopping this show to other networks as well to generate additional revenue.

Starz recently reported a strong second quarter. Total revenue was $410.1 million. Distribution revenue of $75.1 million was a decline from the prior year, due to less Weinstein movie releases. That segment also saw an operating loss for the quarter. Network revenue increased 2% to $328.2 million. OIBDA for the network segment increased 25% to $121.8 million, an impressive increase. Total subscribers for the company declined slightly as the number of Encore subscribers dropped 0.5 million from the prior quarter. Starz subscribers increased 0.1 million to 22.0 million.

This follows up a strong first quarter, which saw overall revenue of $420.0 million. Network revenue was up 3% year over year in the first quarter, while distribution revenue was up 15% for the first quarter. The second quarter also saw Starz buy back 3.1 million shares at a value of $92.7 million. The company continues to buy back shares and increase the valuation for shareholders.

Analysts see full year revenue hitting $1.7 billion, a decline of nearly 5%. In fiscal 2015, revenue is seen increasing 4% to $1.8 billion. The key here is the earnings per share growth. Analysts see 2014 earnings coming in at $2.23. In fiscal 2015, that figure is expected to rise to $2.41. That gives the shares a low price to earnings of 13.5 on a current basis. Looking forward, shares trade at 12.5 times fiscal 2015 expected earnings per share. In my opinion shares should trade closer to 15 times forward earnings, which gives a target of $36.15. This implies 20% of upside at Friday's closing price.

Shares of Starz have traded between $24.00 and $34.20 over the last fifty two weeks. In 2014, shares are up a modest 3%. Shares are now above the $30 level and with the continued positive press for "Outlander", shares could start trending higher. There are several reasons to get behind Starz, whether it's the low valuation, the transition to original programming, possible acquisition target, or the momentum of hit shows. Any way you slice it, Starz stock should be in portfolios.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Entertainment - Diversified
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here