Updated Research Report on Discovery - Analyst Blog

On Mar 14, 2014, we issued an updated research report on Discovery Communications Inc. DISCA. Robust revenue and viewership growth coupled with rating improvement have encouraged the company to raise its guidance for 2014.

Discovery has delivered positive earnings surprise in the last two quarters of the financial year, with an average beat of negative 0.54%. The company reported mixed financial results for the fourth quarter of fiscal 2013 with the bottom surpassing the Zacks Consensus Estimate while the top line missing the same.

Discovery achieved viewership growth for the fifth successive year. In the last five years, the company launched seven new channels in the U.S. Strong viewership ratings of several Discovery channels helped the company to generate healthy advertising revenues.

Furthermore, the company expects mid single-digit growth of affiliate fees from the renewal of three deals and incremental revenues from the Netflix contract renewal. Recently, the company renewed its agreement with Time Warner Cable to offer its content on the latter's TVEverywhere platform. Such video streaming deals with pay-TV operators will add a revenue stream for Discovery in the upcoming quarters.

However, deteriorating cash position coupled with mounting debt may act as headwinds for Discovery while moving ahead. Discovery is also suffering from customer concentration risks. In the U.S., the top 10 distributors accounted for nearly 90% of the company's total distribution revenue. Similarly, in the International markets, the top 10 distributors generate more than 50% of the company's distribution revenues. Loss of any of these distributors will have significant material impact on the company's finances. Moreover, the failure to acquire Scripps Network is a major blow to the company's diversification goal.

Meanwhile, the stock price of the company is currently trading at the high-end of the 52-week price range.

Discovery currently carries a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other better-ranked stocks that belong to the sector include Entravision Communications Corp. EVC, Phoenix New Media Ltd. FENG and Starz STRZA. All three have a Zacks Rank #2 (Buy).