Discovery (DISCA) Up 12.5% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Discovery Communications (DISCA). Shares have added about 12.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Discovery due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Discovery's Q1 Earnings Miss Mark, Revenues Fall Y/Y

Discovery reported first-quarter 2020 adjusted earnings of 87 cents per share, missing the Zacks Consensus Estimate by 1.4% but increasing 2.4% year over year.

Revenues slid 1% year over year to $2.68 billion and also lagged the consensus mark by 1.8%.

This year-over-year decline was attributed to a decrease in advertising (52.3% of revenues) and flat distribution (45.7% of revenues) revenues.

Top-Line Details

Advertising revenues dipped 0.9% year over year to $1.40 billion. Distribution revenues were unchanged at $1.22 billion. Other revenues were $58 million, down 14.7% from the year-ago quarter.

U.S. Networks (65.5% of revenues) revenues stayed at $1.76 billion on a year-over-year basis. Advertising revenues were unchanged while distribution revenues grew 1.6%.

Total portfolio subscribers for March 2020 were 6% lower than the level in March 2019 while subscribers to the fully distributed networks declined 4%.

International Networks revenues (34.5% of revenues) slipped 3% year over year to $923 million. Advertising and distribution revenues were down 4.3% and 2.3%, respectively.

Solid contributions from the UKTV Lifestyle Business and growth in next-generation initiatives aided advertising revenues. However, discontinuation of certain pay-TV distribution agreements in the Nordics and the impact of coronavirus in key advertising markets hurt top-line growth.

However, excluding the foreign exchange impact, International Networks revenue growth was flat as advertising revenues remained unchanged while distribution revenues inched up 1% on a year-over-year basis.

Distribution increased owing to content licensing arrangements and higher affiliate rates in Latin America as well as monetization of Discovery’s next-generation initiatives in Europe and Asia.

Notably, total share of viewing across the international portfolio in the first quarter increased 4%, on average.

Operating Details

In the first quarter, selling, general and administrative (SG&A) expenses increased 3% from the year-ago quarter to $645 million. This year-over-year growth was due to 9% growth in U.S. Networks SG&A and a 13% increase in International Network SG&A.

Higher marketing expenses related to Discovery’s next-generation initiatives escalated SG&A year over year.

Adjusted operating income before depreciation & amortization (OIBDA) decreased 4% from the year-ago quarter to $1.11 billion. Excluding the foreign exchange impact, OIBDA decreased 3%.

U.S. Networks adjusted OIBDA decreased 4.2% from the year-ago quarter to $1.02 billion.

Moreover, International Networks adjusted OIBDA declined 5.5% from the year-ago quarter to $207 million. Excluding the forex impact, adjusted OIBDA was down 2%.

GAAP operating income inched up 0.6% year over year to $779 million.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash & cash equivalents were $1.45 billion compared with $1.55 billion as of Dec 31, 2019.

Moreover, as of Mar 31, 2020, long-term debt was $15.27 billion, higher than $14.81 billion as of Dec 31, 2019.

On Mar 12, 2020, Discovery withdrew $500 million under its $2.5 billion revolving credit facility. Additionally, on Apr 30, the company inked a deal with its lender group, led by Bank of America to amend certain provisions of its revolving credit facilities including resetting the Maximum Consolidated Leverage Ratio to 5.5X from the third quarter of 2020 through the first quarter of 2021.

Free cash flow plunged 54% year over year to $230 million.

Moreover, in February 2020, the company authorized an additional common stock repurchase program worth $2 billion. Discovery completed its erstwhile $1-billion repurchase authorization and bought back an additional $159 million under its new $2-billion repurchase plan.

Key Development in Q1

Discovery and Amazon announced an expanded collaboration that will provide a complimentary one-year subscription to Food Network Kitchen for all Amazon Fire TV and Fire Tablet customers in the United States.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -9.42% due to these changes.

VGM Scores

Currently, Discovery has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Discovery has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Discovery, Inc. (DISCA) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.