MKM: Discovery Undervalued Given Growth Potential, Free Cash Flow Outlook

A combination of secular headwinds and growth in the international segment, along with a strong free cash flow outlook, could mean Discovery Inc DISCA shares are undervalued.

The Analyst

Eric Handler of MKM Partners upgraded Discovery from Neutral to Buy and reiterated a $28 price target. 

The Thesis

“In our view, Discovery's shares do not adequately reflect the quality of its multiyear growth drivers and its potential upside opportunities," Handler said in a Tuesday note.

While the domestic cable network industry has secular headwinds, Discovery is expected to see growth opportunities in its international segment in the coming years, the analyst said.

Skinny bundles, vMVPDs and OTT platforms will help to “lessen the impact" from cord cutting, Handler said. 

Discovery's strong FCF prospects should lead to “rapid” deleveraging and trigger a new share buyback program in 2019, the analyst said. 

“Based on Discovery's desire to maintain 3.5x net leverage, buyback activity could total upwards of $3 billion in the back half of 2019 and nearly $4 billion in 2020." 

Price Action

Discovery shares were trading up more than 3 percent before the close Tuesday. 

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