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The media and entertainment space is rife with M&A activity and investors may want to consider Discovery Communications Inc. (NASDAQ:DISCA) as an overlooked play.
The Analyst
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Macquarie Research's Tim Nollen upgraded Discovery's stock from Neutral to Outperform with a price target boosted from $20 to $26.
The Thesis
Discovery's acquisition of Scripps Networks is a highly accretive deal that the Street is overlooking, Nollen said in a note. Specifically, the deal will be 16 percent accretive to Discovery's EPS and 19 percent for free cash flow in year one, followed by a mid to high-20 percent rate for both metrics in year two. In fact, once the merger is finalized and on track to achieve its metrics, Discovery will likely become a player in further industry consolidation -- either as a buyer or seller.
Scripps' consolidation into one content group that spans the linear and digital space allows for simultaneous content creation and production efficiencies, Nollen said. This has already resulted in $150 million in annual digital advertising revenues that's growing at a double digit rate. The company's online content focuses mostly affluent millennials and can help offset any linear TV ad declines.
Outside of the U.S. market, Discovery's Eurosport Player is "well ahead of the pack" in achieving scale an boasts a "relatively decent" penetration with its rights to the Olympics, Bundesliga, and ATP tennis, the analyst said. This would be good enough to build an international over the top (OTT) platform.
Price Action
Shares of Discover gained more than 3 percent to $23.22 Tuesday.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.