August 16, 2011
Discovery Communications Still Going Strong
Discovery Communications (DISCK) reported another good quarter, matching or exceeding most Street estimates. Revenues grew 11% and EBITDA rose 12%. EPS of 62 cents was a penny ahead of consensus. The company slightly raised guidance to reflect the better than expected second quarter performance. In addition to the solid financial report, the company announced accelerating share repurchases. DISCK was late to the stock buyback game much to the charging of Wall Street. This now appears to be in the past. Share buybacks provide some downside protection and also enhance EPS growth.
The closely watched domestic advertising growth was 14%, indicating that operating fundamentals have not yet been impacted by the slowing economy. Comments on the ad market for the rest of the year were positive, getting a boost in 4Q from the strong upfront selling season. The positive tone of DISCK's advertising surely influenced management to raise guidance. Recent ratings performance has improved at most the company's large networks, providing another boost to the outlook. Affiliate fee growth in the US was 4%, nothing exciting but poised to improve in a few years as contracts are renegotiated.
Trends abroad remain robust with EBITDA up over 30%. Foreign exchange helped but ad and affiliate growth 17% and 12% excluding currency is excellent. DISCK's sizable and fast growing international operations set the company apart from other cable network companies.
In the aftermath of the call several analysts pointed out that DISCK could likely grow through a recession, as it did in 2008/09. Ratings strength and successful rebranding domestically, continue share gains against Broadcast TV, and international provide DISCK a cushion unique amongst major US entertainment companies.
Overall, DISCK shares remain a good value, combining defensive and offensive characteristics. Balance is a good thing in these uncertain times for the global economy.
Disclosure: DISCK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. DISCK is a net long position in the Entermedia Funds. Steve Birenberg is co-portfolio of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies.
Posted by Steve Birenberg at August 16, 2011 01:24 PM in DISCA