Analyst Todd Juenger of Sanford C. Bernstein wasn’t a fan of John Malone’s deal combining Lionsgate with Starz. He’s changed his mind.
Juenger liked Lionsgate’s studio business but saw Starz as an also-ran in an increasingly competitive premium network market.
“Our hypothesis was that most Starz subs never asked for the service in the first place and wouldn't miss it if it were gone. The best way we could think to test that hypothesis was to field a large sample survey. The results give strong evidence our hypothesis was wrong. Starz subs seem to care, a lot,” Juenger said in a research note Tuesday.
As a result, Juenger has upgraded Lionsgate’s stock to outperform and set a target price of $31 a share. Lionsgate closed at $26.36 on Friday.
Starz represents 73% of the combined company’s cash flow, making Starz's performance important.
To see whether or not subscribers like Starz and would keep it in an era of cord shaving and skinny bundles, Juenger performed a consumer survey with 800 respondents.
“The results of this particular survey is one of those instances where the evidence is so consistent and overwhelming, it's enough to convince us that yes, Starz subscribers really do seem to ascribe meaningful value to the service,” he said.
“They claim willingness to pay (and most are paying already, which is a learning in itself), they watch regularly and can correctly name their favorite shows (unaided), they watch a lot of movies (65% of subs watch 1+ movies/week) and rate the movie selection is above average. Pretty impressive for a service we suspected was ignored by a large portion of subs,” he added.
Juenger says that assuming that the AT&T deal goes through, Time Warner shareholders might want to invest their proceeds in Starz, which could now be looked at a “miniature version of Time Warner (without the baggage of Turner).”
Juenger says his math assumes no breakout hits for Starz or that it reduces debut by selling its stake in Epix. Those would represent additional upside, as would a potential takeover bid as the industry consolidates.
Growing competition remains a risk, as does the loss of Disney’s movies, and lower-than-expected over-the-top subscription adds.