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Discovery (DISCA) Q1 Earnings: Disappointment in Store?

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Silver Spring, MD-based Discovery Communications, Inc. is scheduled to report first-quarter 2017 results on May 9, before market opens.

In the last quarter, the company posted a positive earnings surprise of 9.80%. Moreover, the company’s earnings surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average beat of 5.94%.

Of late, the company has been grappling with various issues as reflected by the fact that the Zacks Consensus Estimate has declined by 4 cents to 49 cents over the last 30 days. Further, shares of Discovery have lost 4.68%, significantly underperforming the Zacks categorized Broadcast Radio and Television sector which has gained the same in the last three months.

Let’s see how things are shaping up for this announcement.

Factors at Play

We expect the company to face a few challenges in the first quarter. Foreign exchange-related headwinds are a major constraint. Consequently, the International Networks segment will be affected. This might hurt the top line significantly as a large portion of the revenues are generated from this segment.

Additionally, Discovery is suffering from customer concentration risks. In the U.S., the top 10 distributors accounted for nearly 90% of the company’s total distribution revenues. Similarly, in international markets, the top 10 distributors generate more than 50% of the company’s distribution revenues. Loss of any of these distributors will have a significant material impact on the company’s finances.

However, we are impressed by Discovery's efforts to reward shareholders through buybacks. We note that Discovery has inked multiple deals to expand its reach.

Earnings Whispers

Our proven model does not conclusively show a beat for Discovery this earnings season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: Discovery has an Earnings ESP of -8.16%. This is because the Most Accurate estimate is pegged at 45 cents while the Zacks Consensus Estimate is at 49 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank:  Discovery has a Zacks Rank #4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into an earnings announcement, especially when the company is seeing negative estimate revisions as is the case for Discovery.

Stock to Consider

Investors interested in the broader consumer discretionary sector may consider the following stocks as our model shows that these companies have the right combination of elements to post an earnings beat in their next releases.

Deckers Outdoor Corporation (DECK - Free Report) has an earnings ESP of +50% and a Zacks Rank #3. The company is expected to release fourth-quarter fiscal 2017 results on May 25.

Laureate Education Inc. (LAUR - Free Report) has an earnings ESP of +3.66% and a Zacks Rank #2. The company will report first-quarter 2017 results on May 11.

Marriott International (MAR - Free Report) has an earnings ESP of +1.11% and a Zacks Rank #3. The company is slated to release first-quarter 2017 results on May 8.

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