Please ensure Javascript is enabled for purposes of website accessibility

Discovery Communications, Inc. (DISCA 28)

This media company’s EPS estimates for 2016 have been increased by 22 analysts in the past 30 days. Wall Street is forecasting 25% growth for the company in the current quarter.
We are maintaining our BUY rating on Discovery Communications Inc. (DISCA) to a target price of $40.

While investors can expect costs to rise in the near term as the company increases investments in programming, three recent deals—the renewal of a long-term carriage agreement with Comcast, the acquisition of Olympics broadcast rights, and the acquisition of the remainder of Eurosport International—demonstrate that management is building a foundation for future growth. We see the acquisition of Eurosport, with its range of sports broadcast rights and extensive distribution in Europe and other regions, as a key growth driver.

Although the controlling interest of famed cable investor John Malone may give some investors pause, we think that Mr. Malone’s involvement likely ensures further M&A moves for Discovery as either an acquirer or a target.

While negative foreign exchange movements have hurt Discovery’s reported results, both its U.S. and international networks are showing solid growth on an organic, constant-currency basis. The company’s adjusted first-quarter operating income before depreciation and amortization (OIBDA) rose 7% on a currency-neutral basis and the OIBDA margin expanded by 70 basis points to 37.7%. Discovery has announced a restructuring plan that it expects to generate $80-$120 million in annualized cost savings. It has also raised its adjusted EPS growth forecast for 2016.

We are boosting our 2016 adjusted EPS estimate to $1.95 from $1.92 and our 2017 forecast to $2.16 from $2.13. We expect currency headwinds to moderate in 2016 as the dollar has weakened.

DISCA’s forward enterprise value/EBITDA multiple of 9.8 is 3% above the peer average, less than the average premium of 5% over the past two years.

Our valuation methodology is multistage, including peer analysis, a multiple-analysis matrix applied to our proprietary forecasts, and discounted cash flow modeling. DISCA shares have traded between $24 and $35 over the past year, and are currently in the lower half of that range.

The shares have significantly underperformed the market in the last year, falling 14% compared to a 4% decline for the S&P 500. However, they are up 3% year-to-date, compared to a flat performance for the index. DISCA is trading at a trailing EV/EBITDA multiple of 10.6, above the peer median of 10.2 and Scripps Networks’ 9.1. DISCA’s forward enterprise value/EBITDA multiple of 9.8 is 3% above the peer average, less than the average premium of 5% over the past two years.

We are maintaining our BUY rating on DISCA with a target price of $40.

Jim Kelleher, CFA, Argus Weekly Staff Report,, 212-425- 7500, May 23, 2016

John Eade is President of Argus Research Company and Senior Analyst. Over the years, John’s responsibilities at Argus have included chairing the Investment Policy Committee as Director of Research, helping form the firm’s overall investment strategy, writing a weekly investment column and authoring the flagship Portfolio Selector. John has also provided coverage of the Healthcare, Financial and Consumer sectors. John has been with Argus since 1989. He has an MBA in Finance from New York University’s Stern School of Business and a Bachelor’s degree in Journalism from Northwestern University’s Medill School of Journalism. He has been interviewed and quoted extensively in The New York Times, Forbes, Time, Fortune and Money magazines, and has been a frequent guest on CNBC, CNN, CBS News, ABC News and the Bloomberg Radio and Television networks. John is a founder and board member of the Investorside Research Association, an industry trade organization. He is also a member of the New York Society of Security Analysts and the CFA Institute.