BUY: Discovery Communications Inc. (NASDAQ:DISCA)

BUY: Discovery Communications Inc. (NASDAQ:DISCA)

November 7, 2017

Today I purchased 1000 shares of Discovery Communications Inc. (NASDAQ:DISCA).  DISCA owns the Discovery Channel along with other names such as TLC, Eurosport, Animal Planet and OWN Network.  The company is a cash flow machine, earning about $2.00 per share in 2016, after tax.  The shares are down about 40% this year and I purchased at USD $18/shr.  The shares have traded down over concerns, including:

  1. Cord Cutting. DISCA earns money from Cable Networks who include their channels in their Cable bundle.  DISCA earns a few dollars per 91 million subscribers a month.  In addition to advertising which is sold on their channels.  However, investors are concerned that as consumers cancel their cable and or are able to pick and chose channels they want to buy, subscribers will decline – indeed, subscribers are down 5% year over year.
  2. DISCA has agreed to purchase Scripps Network – owner of HGTV, Food Network, Cooking Channel and the DIY Network.  They paid fair value (after close there won’t be any big bump in earnings) but they can take out about $.50 per share in costs from the combined company.  Investors are worried that DISCA is doubling down in an uncertain sector.
  3. Lastly, I think they’ve been trading down because of a general lack of interest in anything to do with traditional broadcast/media.  Let’s face it, all the action is with Facebook, Google, Netflix, and the like.

Of course, I have a different take on it.  It’s rare to get a business like DISCA for 9x earnings.  It’s rarer too to get a business for 9x earnings which sort of just spins off cash – they don’t really have a lot of capital expenditures.  Agreed, there is some uncertainty with the traditional model.  However, won’t consumers pay for a bundle of Discovery, Animal Planet, HGTV, Food Network, etc.?  Would $4 per month be worth it?  $4/month x 90 million people is $4.5 billion a year (the market cap for the combined firm will be something like $15 billion).  And that is just for the US…these networks earn billions from subscribers in Europe.

I’m a value guy and the value is good on this one, I believe.