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Why Is Discovery (DISCA) Down 22.9% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Discovery Communications (DISCA). Shares have lost about 22.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Discovery due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Discovery Q4 Earnings Beat Mark, Revenues Rise Y/Y

Discovery reported fourth-quarter 2019 adjusted earnings of 98 cents per share, beating the Zacks Consensus Estimate by 5.4% and also increasing 19.5% year over year.

Revenues increased 2.3% year over year to $2.87 billion and beat the consensus mark by 0.1% as well. Also, excluding the foreign exchange impact, revenues increased 4%.

This year-over-year growth was driven by an increase in advertising (55.6% of revenues) and distribution (41.9% of revenues) revenues.

Top-Line Details

Advertising revenues grew 1.5% year over year to $1.60 billion. Distribution revenues increased 4.8% from the year-ago quarter to $1.20 billion.

Other revenues were $73 million, down 15.1% from the year-ago quarter.

U.S. Networks (61% of revenues) revenues rose 1.7% from the year-ago quarter to $1.75 billion. Advertising and distribution revenues were up 1% and 4.5%, respectively.

Advertising growth was driven by increases in pricing, continued monetization of digital content offerings and inventory. Rise in distribution revenues was driven by increased contractual affiliate rates and additional carriage on streaming platforms.

International Networks revenues (38.9% of revenues) rose 3.2% year over year to $1.12 billion. Advertising and distribution revenues were up 2.4% and 5.1%, respectively.

However, excluding the foreign exchange impact, International Networks revenues grew 7% as advertising revenues increased 5% and distribution revenues 10% on a year-over-year basis.

Advertising growth was driven by contribution from the UKTV Lifestyle business and progress in direct-to-consumer initiatives.

Moreover, the uptick in distribution revenues was owing to content licensing arrangements and higher affiliate rates in Discovery’s Latin America business unit. Moreover, higher affiliate rates and monetization of direct-to-consumer initiatives in Europe and Asia boosted revenues in the reported quarter.

Operating Details

In the fourth quarter, selling, general and administrative (SG&A) expenses increased 20.7% from the year-ago quarter to $793 million.

Adjusted operating income before depreciation & amortization (OIBDA) decreased 7.7% from the year-ago quarter to $1.11 billion. Excluding foreign exchange impact, OIBDA grew 9%.

U.S. Networks adjusted OIBDA decreased 4% from the year-ago quarter to $925 million.

Moreover, International Networks adjusted OIBDA declined 10% from the year-ago quarter to $315 million. Excluding forex impact, adjusted OIBDA increased 5%.

GAAP operating income dipped 0.8% year over year to $705 million.

Balance Sheet

As of Dec 31, 2019, cash & cash equivalents were $1.55 billion compared with $813 million as of Sep 30, 2019.

Moreover, as of Dec 31, 2019, long-term debt was $14.81 billion, higher than $14.76 billion as of Sep 30, 2019.

Free cash flow was $1.13 billion, up from $884 million reported in the previous quarter.

Discovery repurchased nearly 12 million shares for $337 million in the reported quarter. In February 2020, the company authorized an additional common stock repurchase program worth $2 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Discovery has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. It's no surprise Discovery has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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