Weekly Equity Idea Highlight - 2019 10 19
Current market expectations for DISC.A are overly pessimistic. Markets expect UAFRS-based (Uniform) ROA (ROA') to be cut in half, with the company not growing at all going forward.The market is spooked by the pressure that many secondary media companies like Viacom have come under, which has led their returns to fall, and is expecting the same to happen for Discovery. In reality, Discovery has built a unique franchise of businesses, focused on niches others do not have significant strength in, to be able to sustain their returns.
Because of Discovery's strong set of businesses, including their smart acquisitions of Scripps in 2018, and the Oprah Winfrey network in 2017, they have actually seen returns expand. They are monetizing these businesses, which offer differentiated offerings, in their current marketplaces, and by expanding them to new marketplaces. Because of their strong economic moats, it is unlikely they will see returns decline, and growth slow, as the market expects.
On top of this, management's alignment, focused on asset efficient, high margin growth, is likely to focus management to execute on their strategy, contrary to market expectations. Also, management is showing growing confidence about audience growth trends, demand trends, and their content strength.
Considering low market expectations, in terms of Uniform ROA declines, the company's strong position and strategy, and confidence about executing on their strategy for the business, current low equity valuations appear unreasonable, spelling potential for equity upside.
Discovery, through its subsidiaries, is a media company that provides content across distribution platforms, including pay-television, free-to-air and broadcast television, and direct-to-consumer subscription products. The company's portfolio of networks includes nonfiction television brands such as Discovery Channel, HGTV, Food Network, TLC, Animal Planet, Science Channel, and MotorTrend . The company's portfolio includes Eurosport, a sports entertainment provider. The company classifies its operations in two segments: U.S. Networks, consisting of domestic television networks and digital content services, and International Networks, consisting of international television networks and digital content services.
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