Discovery Communications Viewership May Drop Further

On Dec 24, 2014, we issued an updated research report on Discovery Communications Inc. (DISCA). The company has delivered positive earnings surprises in four quarters last year, with an average beat of 11.78%. It also reported mixed financial results in the third quarter of 2014 wherein earnings surpassed the Zacks Consensus Estimate while revenues missed the same.

Meanwhile, the company apprehends a further drop in viewership numbers going ahead. This might severely impair ad revenues which strongly depend on viewership ratings, which again tend to change with time. Moreover, the company’s channels lack popular TV shows, thereby hampering its competitive position to a large extent. Also, a persistent decline in TV viewing in the U.S. may pose serious threat to media companies in the domestic market.

In order to attract more viewers, Discovery Communications needs to increasingly invest in new content to counter competition as well as to cater to audience taste and preference. Moreover, mega sporting events like the FIFA World Cup and the Olympics will further result in rating downgrades for the company. Discovery is also highly exposed to foreign currency exchange rate risks as the company generates nearly 50% of its revenues from outside the U.S.

Moreover, deteriorating cash position coupled with mounting debts may act as headwinds for Discovery Communications while moving ahead. Operating expenses grew 19% mainly attributable to increased content expenses and production costs associated with production studios and personnel costs

Discovery Communications currently carries a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look

Other better-ranked stocks that belong to the same sector include Nexstar Broadcasting Group, Inc. (NXST), Time Warner Inc. (TWX) and Sirius XM Holdings Inc. (SIRI). Al three sports a Zacks Rank #2 (Buy).