Discovery Communications (DISCA) Poised for Strong Q2 Earnings

We expect Discovery Communications, Inc. DISCA to beat earnings when the company reports its quarterly numbers on July 31, 2014, before the opening bell.

Last quarter, the company had delivered a 5.6% positive earnings surprise. Let's see how Discovery Communications is positioned prior to the second quarter's announcement.

Why a Likely Positive Surprise?

Our proven model shows that Discovery Communicationsis likely to beat earnings because it has the perfect combination of two key ingredients.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.1%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: Discovery Communicationscurrently has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, the Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Discovery Communications' Zacks Rank #3 and +1.1% ESP makes us reasonably confident of a positive earnings beat on July 31.

What is Driving the Better-than-Expected Earnings?

Strong viewership ratings of several Discovery channels are helping the company to generate healthy advertising revenues. In the previous quarter, advertising revenues from the International Networks segment recorded revenue growth of a whopping 108% year over year. We expect strong international revenues again in the second quarter driven by strong growth in Brazil, Mexico and Turkey where penetration rate is below 50%.          

In March, the company sealed a deal to supply its programs to Wasu's new digital subscription channel, Qui Suo. Wasu is a media and cable television company in China. Discovery Communications' deal with Wasu seems to be the ideal platform for the former's business expansion plans in China as the latter has nearly 20 million cable subscribers in China and also dominates the country's video streaming market. This deal should further drive the company's international revenues higher in the second quarter and thereafter.

Other Stocks to Consider

Here are some companies worth considering as our model shows these have the right combination of elements to post an earnings beat this quarter:

TIM Participacoes S.A. TSU, with earnings ESP of +16.7% and a Zacks Rank #1.

Time Warner Inc. TWX, with earnings ESP of +1.2% and a Zacks Rank #3.

ViaSat Inc. VSAT, with earnings ESP of +375% and a Zacks Rank #3.