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Discovery Communications (DISCA) Down 5.7% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Discovery Communications, Inc. (DISCA - Free Report) . Shares have lost about 5.7% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is DISCA due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Discovery delivered first-quarter 2018 adjusted earnings of 53 cents per share that beat the Zacks Consensus Estimate by 8 cents.

The figure excluded restructuring costs and other Scripps related transaction costs, primarily legal and financial fees from legacy Scripps and included $226 million (37 cents per share) of after-tax restructuring costs and other transaction costs.

Adjusted earnings (excluding the impact of amortization of acquisition-related intangible assets, net of tax) were 16 cents per share compared with 41 cents reported in the year-ago quarter.

Revenues surged 43% year over year to $2.31 billion. Excluding the impact of foreign currency and the Scripps Networks Interactive, The Enthusiast Network and the Oprah Winfrey Network transactions (collectively called “Transactions”), revenues increased 14%. On a pro forma basis, revenues advanced 10% from the year-ago quarter.

Distribution revenues (45.6% of revenues) increased 22.9% from the year-ago quarter to $1.05 billion. Advertising revenues (43.9%) rose 47.3% to $1.01 billion. Other revenues were $244 million compared with $71 million reported in the year-ago quarter.

Segment Details

U.S. Networks (50.9% of revenues) increased 41.6% from the year-ago quarter to $1.17 billion. Excluding the impact of “Transactions”, revenues inched up 3%, as distribution and advertising revenues grew 2% and 4%, respectively.

On a pro forma basis, U.S. Networks' revenues grew 2%, driven by 2% growth in distribution revenues and 2% improvement in advertising revenues.

Distribution revenue growth was driven by increases in affiliate fee rates, partially offset by a decline in affiliate subscribers. Advertising revenues primarily came on the back of continued monetization of digital content offerings as well as higher volumes, partially offset by lower linear delivery.

On a pro forma basis, subscribers to Discovery’s fully distributed networks declined 3%, while subscribers to the company’s total portfolio fell 5% in the quarter.

International Networks revenues (47.6% of revenues) soared 47% year over year $1.09 billion. Excluding the impact of the acquisition of Scripps and currency effects, segment revenues increased 28%, driven by 10% growth in distribution revenues, 11% increase in advertising revenues and significant improvement in other revenues.

On a pro forma basis, International Networks' revenues increased 26%, driven by 9% increase in distribution revenues, 11% growth in advertising revenues and significant increase in other revenues.

Discovery’s international networks’ distribution revenues benefited from increased digital revenues and higher contractual rates in Europe, solid contributions from content deliveries under licensing agreements in Asia and increased rates in Latin America.

However, subscriber count declined in Latin America, contractual rates were down in Asia. These hurt international networks’ distribution top-line growth.

Advertising revenues benefited from increased pricing and volume across key markets in Europe as well as higher ratings from coverage of the Olympics. However, lowered pricing and delivery in Latin America and Asia negatively impacted revenues.

Education revenues (1.5% of revenues) declined 5.4% year over year to $35 million in the reported quarter.

Operating Details

In the first quarter, adjusted operating income before depreciation & amortization (OIBDA) increased 15.6% from the year-ago quarter to $697 million. Excluding the impact of the “Transactions” and foreign currency fluctuations, adjusted OIBDA decreased 9%.

U.S. Networks grew 3%, which was fully offset by a 37% decline at international networks, primarily attributed to the timing of costs associated with the Olympics. U.S. Networks’ profitability was negatively impacted by higher content spending and digital media production costs.

On a pro forma basis, excluding the impact of foreign currency, adjusted OIBDA declined 6%. U.S. Networks’ adjusted OIBDA grew 1%, which was fully offset by 30% decline in international networks’ adjusted OIBDA.

Balance Sheet & Cash Flow

As of Mar 31, 2018, cash & cash equivalents were $812 million as compared with $7.31 billion as of Dec 31, 2017.

Long term debt was $19.21 billion, much higher than $14.76 billion at the end of the previous quarter.

Cash flow from operating activities was $160 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to two lower.

Discovery Communications, Inc. Price and Consensus

VGM Scores

At this time, DISCA has a strong Growth Score of A, though it is lagging a bit on the momentum front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, DISCA has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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