CLSA Upgrades Starz To Outperform, Target Raised To $31

CLSA’s Vasily Karasyov believes it's a good time to buy Starz STRZA. The analyst upgraded the rating on the company from Underperform to Outperform, while raising the price target from $24 to $31.

Karasyov mentioned the stock was attractive at present due to “1) stabilizing Networks revenue trends; 2) visibility into 2016 and 2017 programming costs and therefore Oibda; 3) the proximity of 2017, when the costs of DIS films falls dramatically; and 4) attractive valuation.”

Programming Costs

The analyst pointed out that while the company’s top line has stabilized, there is greater visibility into programming costs.

“An improved YoY revenue trend in 1Q16 gives us incremental comfort with the Networks’ top-line trajectory for the remainder of the year,” Karasyov said.

Karasyov explained that management had high visibility into the 2016 costs due to output deals being priced according to the domestic box for 2015 releases and the number of episodes and budget for orginals being known.

“Our analysis shows DIS films will cost STRZA $138m in cash this year and $97m in P&L costs in 2016. These fall dramatically in 2017 after the agreement with DIS ends,” the analyst noted.

Distribution

Karasyov believes the debate regarding whether Starz would be able to renew its upcoming distribution agreement would continue until the agreement was announced, and mentioned that there was more room for a deal than the current concerns appear to suggest.

“We note that unlike basic channels, premium networks share economics with distributors,” the analyst stated.