Updated Research Report on Discovery Communications - Analyst Blog

On Jun 18, 2014, we issued an updated research report on Discovery Communications Inc. DISCA.

Discovery has delivered positive earnings surprises in three quarters last year, with an average beat of 2.72%. The company reported mixed financial results for the first quarter of 2014 with the bottom surpassing the Zacks Consensus Estimate and the top line missing the same.

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

Furthermore, the company expects mid single-digit affiliate fees growth from the renewal of three deals and incremental revenues from the Netflix contract renewal. Recently, Discovery 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 boost revenues for Discovery going ahead.

Recently, Discovery struck a deal with Chinese media and cable TV company, Wasu. This deal is likely to help the company expand its operations in China as the latter has nearly 20 million cable subscribers and dominates the nation's video streaming market.

Discovery also completed the acquisition of a controlling stake in Eurosport International, a popular sports entertainment group, for $1.2 billion. Eurosport has a strong presence in 54 nations, thereby allowing Discovery to further boost its global presence.

On the downside, deteriorating cash position coupled with mounting debts may act as headwinds for Discovery while moving ahead. Discovery is also facing 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, 10 major distributors generated over 50% of the company's distribution revenues. Loss of any of these distributors will significantly impact the company's finances. Moreover, the failure to acquire Scripps Networks Interactive, Inc. SNI is a major blow to the company's diversification goal.

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


Stocks That Warrant a Look

Other better-ranked stocks that belong to the sector include Grupo Televisa, S.A.B. TV and LIN Media LLC LIN. Both the stocks sport a Zacks Rank #2 (Buy).