This write-up is going to be short and sweet for two reasons – 1) the idea has been thoroughly reviewed on VIC before and 2) it is time sensitive.
LSTZA is a long because it is a very cheap stock with multiple embedded options for growth, value creation and financial engineering. Additionally, there is a (very) near-term catalyst that could draw attention to the LSTZA situation – theLibertyanalyst day scheduled for Thursday, November 17, 2011.
Starz has been written up on VIC twice before, by Rotin and flyer, in late 2009 and early 2011, respectively. The business is essentially unchanged since those pieces were published, so I will keep my thoughts to what has changed since early 2011, updated valuation, and near term events.
What has changed: Not much, though the fundamentals have strengthened, we got clarity on NFLX, and the LINTA spin is behind us.
Fundamentally, things have continued to improve at LSTZA throughout 2011. Subscriber growth has been strong for the first 9 months of the year, growing by more than 1.6MM subscribers (9%) over the comparable period last year. Earnings continue to grow both with the subscriber count and small price increases, cash flow continues to closely track earnings, and the cash continues to pile up on the Starz balance sheet (more about the cash later.)
The drawn out saga between LSTZA and NFLX mercifully came to an end in Q3 2011, with the Starz walking away from the table (seemingly once and for all.) When I first got involved with LSTZA, the idea of monetizing streaming rights was but a footnote in the investment case for the stock, and I have been incredibly frustrated that it became such a major part of the “story” around Starz in the last year or so. Good riddance, NFLX.
The Liberty Interactive (LINTA) hard spin was successfully completed at the end of September 2011.Libertymanagement had been incredibly careful about altering the capital structure of any of the trackers prior to the spin for fear of muddying the legal and tax side of the transaction. With this event behind us, management can work on ooptimizing the LSTZA capital structure. Sure enough, management disclosed in the Q3 earnings report last week that they had repurchased $51MM of LSTZA stock thru October 31, 2011 at an average price in the low $60s.
Valuation: In a word, cheap. In two words, really cheap.
LSTZA has $1.059B of cash, $41MM of debt and a $172MM intra-company loan to LCAPA, for total effective net cash of $1.19B. With 49.2MM shares outstanding, this equates to just more than $24/share in cash per share.
Ex-cash, LSTZA trades for ~10x 2011 EPS ($68 stock price - $24 cash = $44/$4.75 EPS.) On an EV/EBITDA basis, it is ridiculously cheap at ~4.7x. As Rotin pointed out in his January write up, one can look at the embedded or explicit valuations of any number of other media companies and get to values 50 to 100% higher than where LSTZA trades today.
While LSTZA is cheap even on current operating metrics, we also get optionality on a number of things for free: Albrecht creating great content; monetizing the digital rights they didn’t sell to NFLX; Malone and Maffei’s financial engineering. I don’t know when or if these options will be monetized, but we are not paying a penny for them at the current share price.
The risk to the valuation is that LSTZA is a value-trap. But I think of a classic value trap as a company that looks cheap on current metrics, but has declining prospects and potentially a deteriorating balance sheet. Starz is growing subscribers, taking price increases and massively overcapitalized. Could it be dead money? Yes. Are you likely to experience permanent destruction of capital? No.
Catalysts: Coming soon (?)
Libertyis holding its annual analyst day on Thursday, November 17th. It is possible this will be a non-event for LSTZA’s stock price. But it’s also possible that we meaningful information. This could range from the simple and hard to quantify, such as highlighting Albrecht and the creative team more, to the complex and numbers-driven, such as...
Announcing a plan for a major buyback at LSTZA with the cash on hand (shrinking the share count by a third.)
Going further and levering LSTZA for a more serious recapitalization (taking on 2 turns of EBITDA in debt would enable them to buyback 2/3 of the shares.)
Timeline for a hard spin of the LSTZA and LCAPA trackers.
Folding LSTZA into LCAPA and making the entire entity an asset backed stock (i.e. a “real” stock as opposed to a tracker.)
It is worth noting that rumors surfaced last week that Liberty Starz was in the market for a $1.5B credit line. Maybe it’s true, maybe it’s not (management didn’t deny it), and maybe it isn’t brought to light at the analyst day. But my bet is on something meaningful happening with the capital structure in the near-term – Malone & Maffei simply can’t stand to sit on such an under-levered vehicle.