Discovery (DISCA) Up 12.5% ​​Since Last Earnings Report: Can It Continue?

It’s been a month since Discovery Communications’ (DISCA) last reported earnings, with shares up about 12.5% ​​in that time, outperforming the S&P 500.

Will the recent positive trend continue into its next earnings release, or is Discovery headed for a pullback? Before we dive into how investors and analysts have reacted recently, let’s take a quick look at the latest earnings report to better understand the important factors.

Discovery’s Q1 earnings miss expectations, revenue falls year-over-year

Discovery reported first-quarter 2020 adjusted net income of 87 cents per share, missing the Zacks Consensus Estimate by 1.4% but up 2.4% year over year.

Revenue fell 1% year-over-year to $2.68 billion and was 1.8% below the consensus estimate.

The year-on-year decline was due to a decrease in advertising revenues (52.3% of revenues) and distribution revenues remaining at the same level (45.7% of revenues).

Details of the most important products

Advertising revenue fell 0.9% year over year to $1.40 billion. Distribution revenue was flat at $1.22 billion. Other revenue was $58 million, down 14.7% from the same quarter last year.

US Networks revenue (65.5% of revenue) remained at $1.76 billion year over year. Advertising revenues remained unchanged, while distribution revenues increased by 1.6%.

The total number of portfolio subscribers in March 2020 was 6% lower than in March 2019, while the number of fully distributed network subscribers decreased by 4%.

International Networks revenue (34.5% of revenue) fell 3% year over year to $923 million. Advertising and distribution revenue fell 4.3% and 2.3%, respectively.

Solid contribution from UKTV Lifestyle Business and growth in next generation initiatives supported advertising revenues. However, the discontinuation of some pay-TV distribution deals in the Nordics and the impact of the coronavirus on key advertising markets hurt revenue growth.

However, excluding the impact of currency exchange rates, International Networks revenue growth was flat as advertising revenue remained flat while distribution revenue increased 1% year-over-year.

Distribution increased due to content licensing agreements and higher affiliate rates in Latin America, as well as the monetization of Discovery’s next-generation initiatives in Europe and Asia.

It is worth noting that the average audience share of films from the entire international portfolio increased by 4% in the first quarter.

Operational details

In the first quarter, selling, general and administrative (SG&A) expenses increased 3% compared to the same quarter last year to $645 million. The year-over-year increase was driven by a 9% increase in SG&A expenses at US Networks and a 13% increase in SG&A expenses at International Network.

Higher marketing expenses associated with Discovery’s next-generation initiatives have resulted in SG&A costs escalating year over year.

Adjusted operating income before depreciation and amortization (OIBDA) declined 4% from the year-ago quarter to $1.11 billion. Excluding the impact of foreign exchange rates, OIBDA decreased by 3%.

Adjusted OIBDA for US Networks decreased 4.2% from the prior-year quarter to $1.02 billion.

Additionally, International Networks’ adjusted OIBDA declined 5.5% from the year-ago quarter to $207 million. Excluding currency effects, adjusted OIBDA fell 2%.

GAAP operating income increased 0.6% year over year to $779 million.

Balance sheet and cash flow

As of March 31, 2020, cash and cash equivalents were $1.45 billion compared to $1.55 billion as of December 31, 2019.

Moreover, as of March 31, 2020, long-term debt amounted to USD 15.27 billion and was higher than USD 14.81 billion as of December 31, 2019.

On March 12, 2020, Discovery withdrew $500 million of its $2.5 billion revolving credit facility. Additionally, on April 30, the company signed an agreement with its Bank of America-led lending group to amend certain provisions of its revolving credit facility, including resetting the maximum consolidated leverage ratio to 5.5X from the third quarter of 2020 to the first quarter of 2021 .

Free cash flow fell 54% year over year to $230 million.

Additionally, in February 2020, the company authorized an additional $2 billion of common stock repurchase program. Discovery terminated its existing $1 billion repurchase authorization and repurchased an additional $159 million under the new $2 billion repurchase plan.

Key events in Q1

Discovery and Amazon have announced an expansion of their partnership that will provide all Amazon Fire TV and Fire Tablet customers in the United States with a free one-year subscription to Food Network Kitchen.

How have estimates changed since then?

Investors have witnessed a downward trend in estimate revisions over the past month. The consensus estimate moved -9.42% due to these changes.

VGM Results

Discovery currently has an average growth score of C, which indicates the same momentum score. However, the stock is rated A for value, putting it in the top quintile for this investment strategy.

Overall, the stock has a Composite VGM Score of B. If you’re not focused on a single strategy, this rating should interest you.

Perspectives

The stock’s estimates are trending lower, and the magnitude of these revisions indicates a downward shift. It’s no surprise that Discovery has a Zacks Rank #4 (Sell). We expect a below-average return for the stock over the next few months.

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