Deutsche Bank: Time To Buy Starz

In a report published Wednesday, Deutsche Bank analysts initiated coverage of Starz STRZA with a Buy rating and a price target of $48.

Starz is an improving story that lacks many of the more concerning attributes of other media stocks. Starz is in the early stages of a positive content cycle…With several new shows debuting in 2015, we think Starz can build on this success.

The analysts believe that the company could beat the current consensus margin estimates. The market does not seem to be taking into account the fact that Starz can meet its target of 75-80 original content episodes per year in 2015. "Even assuming a continued increase in originals spend during subsequent years, we estimate there will be a material margin benefit from the contract roll-off."

Recent press reports have indicated John Malone’s stock swap with Lions Gate Entertainment Corp. (USA) LGF could lead to a merger. In that event, Lions Gate would become a source of high value programming for Starz, while the latter would offer Lions Gate a substantial subscription revenue stream.

"What has received less attention is the opportunity to lower Starz’ tax rate through Lionsgate’s Canadian domicile, a potentially material synergy," the analysts explained.

Deutsche Bank noted the other positives as:
Starz is poised to grow subscribers from the current 23M with pay TV distributor consolidation as a growth driver

• The company has no advertising exposure
• International is an untapped long term opportunity
• The company could benefit from a shift to smaller bundles
• Positive optionality from industry consolidation