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Discovery (DISCA) Down 14.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Discovery Communications (DISCA - Free Report) . Shares have lost about 14.4% in that time frame, underperforming the S&P 500.

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

Discovery Q3 Results Hurt By Higher Restructuring Charges

Discovery reported third-quarter 2018 earnings of 16 cents per share that plunged 57.9% year over year. Higher restructuring and other charges associated with the integration of Scripps Networks as well as higher tax and interest expenses negatively impacted the bottom line.

Adjusted earnings, excluding the impact of amortization of acquisition-related intangible assets, net of tax was 52 cents per share. Moreover, adjusted earnings excluding restructuring and other charges were 79 cents and included $190 million (or 27 cents per share) of after-tax restructuring and other charges.

Revenues surged 57% year over year to $2.59 billion. Excluding the impact of foreign currency and the Scripps Networks Interactive, and The Enthusiast Network and the Oprah Winfrey Network transactions (collectively called “Transactions”), revenues increased 1%.

On a pro forma combined basis (if the “Transactions” had occurred on Jan 1, 2017), excluding the impact of foreign currency fluctuations, revenues inched up 2% from the year-ago quarter.

Quarter Details

Distribution revenues (44.4% of revenues) increased 30.8% from the year-ago quarter to $1.15 billion. Advertising revenues (52.7%) surged 93.6% to $1.37 billion. Other revenues were $75 million compared with $65 million reported in the year-ago quarter.

On a pro forma combined basis (if the “Transactions” had occurred on Jan 1, 2017), excluding the impact of foreign currency fluctuations, Distribution and Advertising revenues increased 2% and 4%, respectively. Other revenues plunged 27% year over year.

U.S. Networks (64.6% of revenues) surged 103.4% from the year-ago quarter to $1.67 billion. Excluding the impact of “Transactions”, revenues inched up 2%. On a pro forma combined basis, U.S. Networks' revenues grew 4%.

On a pro forma combined basis, subscribers to Discovery’s fully distributed networks declined 2%, while subscribers to the company’s total portfolio fell 5% in the quarter.

International Networks’ revenues (35.3% of revenues) increased 15% year over year $916 million. Excluding the impact of the acquisition of Scripps and currency effects, segment revenues increased 3%.

On a pro forma combined basis, excluding the impact of foreign currency fluctuations, international networks' revenues increased 2%.

Education revenues (0.1% of revenues) declined 90.6% year over year to $3 million in the reported quarter.

In the third quarter, adjusted operating income before depreciation & amortization (OIBDA) surged 81.6% from the year-ago quarter to $1.04 billion. Excluding the impact of the “Transactions” and foreign currency fluctuations, adjusted OIBDA increased 9%. U.S. Networks grew 6%, while international networks rallied 21%.

On a pro forma combined basis, excluding the impact of foreign currency, adjusted OIBDA increased 18%. U.S. Networks’ adjusted OIBDA grew 13%, while international networks’ adjusted OIBDA rose 27%.

Balance Sheet

As of Sep 30, 2018, cash & cash equivalents were $531 million compared with $392 million as of Jun 30, 2018.

Long-term debt was $15.83 billion, lower than $19.21 billion at the end of the previous quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Discovery has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Discovery has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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