On Nov 24, 2015, we issued an updated research report on Discovery Communications, Inc. DISCA.
Discovery Communications posted positive earnings surprises in the last four quarters, with an average of 11.58%. The numbers were, however, mixed in the third quarter of 2015 as the top line missed the Zacks Consensus Estimate.
At the end of third quarter of 2015, Discovery’s U.S. Network segment reported 8% year-over-year revenue increase mainly driven by 6% annual growth in advertising revenues. The company also issued guidance for fiscal 2015 with revenues expected to grow between 9% and 10% and adjusted OIBDA projected to increase in the mid single-digit range.
In order to enhance its channel portfolio as well as drive value for distributors and advertisers, the media firm constantly strikes multi-platform deals with companies like Hulu, Cablevision and Mediacom.
However, Discovery’s ad revenues are heavily dependent on viewership ratings, which tend to change with time. In order to register more viewers, the company needs to invest in new content to counter competition and cater to changing audience taste and preference. Further, the recent acquisitions may lead to integration risks for the company.
We are also concerned about the 14% decline in international advertising revenues in third-quarter 2015. Overall advertising revenues fell 3.6%. Discovery is also highly exposed to foreign currency exchange rate risks as it generates nearly 50% of revenues from outside the U.S. The company also lacks diversification which may hurt its business, going forward.
Discovery currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are AMC Networks Inc. AMCX, Salem Media Group, Inc. SALM and Sinclair Broadcast Group, Inc. SBGI. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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