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Discovery to Underperform

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On Oct 1, 2013, we initiated our coverage on Discovery Communications Inc. (DISCA - Free Report) with an Underperform recommendation. In the second quarter of 2013, the company’s top and bottom lines lagged the Zacks Consensus Estimate. Moreover, management lowered its previously given financial outlook for full-year 2013.

Why Underperform?

Discovery is a pure-play non-fiction TV content developer. The non-fiction media market is highly competitive and as a leading player of this segment, Discovery is also facing fierce competition. The company’s national TV networks compete with other broadcast and national TV networks. Discovery is highly susceptible to changes in the distribution and viewing of TV channels. Massive growth of personal digital video recorders (DVRs), video-on-demand technology, IPTV, smartphones and tablets may completely change the TV viewing landscape, which may jeopardize the company’s business model. 

In the second quarter of 2013, Discovery was significantly hurt by higher taxes and amortization costs related to the SBS Nordic acquisition. Management also stated that the company’s bottom line will continue to decline owing to the SBS Nordic acquisition. In addition, a large portion of Discovery’s total revenue is generated from outside the U.S., which is susceptible to near-term global macroeconomic volatility and foreign currency exchange rate fluctuations.

Other Stocks to Consider

Discovery currently has a Zacks Rank #4 (Sell). While we prefer to avoid Discovery until we see signs of improvement in the company's performance, other media stocks worth a look are Cumulus Media Inc. , Phoenix New Media Ltd. and Starz . All three stocks currently carry a Zacks Rank #1 (Strong Buy).

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