This media company’s EPS estimates for 2016 have been increased by 22 analysts in the past 30 days. Wall Street is forecasting 25% growth for the company in the current quarter.
We are maintaining our BUY rating on Discovery Communications Inc. (DISCA) to a target price of $40.
While investors can expect costs to rise in the near term as the company increases investments in programming, three recent deals—the renewal of a long-term carriage agreement with Comcast, the acquisition of Olympics broadcast rights, and the acquisition of the remainder of Eurosport International—demonstrate that management is building a foundation for future growth. We see the acquisition of Eurosport, with its range of sports broadcast rights and extensive distribution in Europe and other regions, as a key growth driver.
Although the controlling interest of famed cable investor John Malone may give some investors pause, we think that Mr. Malone’s involvement likely ensures further M&A moves for Discovery as either an acquirer or a target.
While negative foreign exchange movements have hurt Discovery’s reported results, both its U.S. and international networks are showing solid growth on an organic, constant-currency basis. The company’s adjusted first-quarter operating income before depreciation and amortization (OIBDA) rose 7% on a currency-neutral basis and the OIBDA margin expanded by 70 basis points to 37.7%. Discovery has announced a restructuring plan that it expects to generate $80-$120 million in annualized cost savings. It has also raised its adjusted EPS growth forecast for 2016.
We are boosting our 2016 adjusted EPS estimate to $1.95 from $1.92 and our 2017 forecast to $2.16 from $2.13. We expect currency headwinds to moderate in 2016 as the dollar has weakened.
DISCA’s forward enterprise value/EBITDA multiple of 9.8 is 3% above the peer average, less than the average premium of 5% over the past two years.
Our valuation methodology is multistage, including peer analysis, a multiple-analysis matrix applied to our proprietary forecasts, and discounted cash flow modeling. DISCA shares have traded between $24 and $35 over the past year, and are currently in the lower half of that range.
The shares have significantly underperformed the market in the last year, falling 14% compared to a 4% decline for the S&P 500. However, they are up 3% year-to-date, compared to a flat performance for the index. DISCA is trading at a trailing EV/EBITDA multiple of 10.6, above the peer median of 10.2 and Scripps Networks’ 9.1. DISCA’s forward enterprise value/EBITDA multiple of 9.8 is 3% above the peer average, less than the average premium of 5% over the past two years.
We are maintaining our BUY rating on DISCA with a target price of $40.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425- 7500, May 23, 2016
