A month has gone by since the last earnings report for Discovery Communications (NASDAQ:DISCA). Shares have lost about 3.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Discovery due for a breakout? 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 catalysts.
Discovery Q4 Benefits From Strong Top-line Growth
Discovery reported fourth-quarter 2018 earnings of 38 cents per share compared with a loss of $1.99 in the year-ago quarter. Excluding the impact of amortization of acquisition-related intangible assets net of tax, adjusted earnings were 74 cents per share.
Moreover, adjusted earnings, excluding $62 million (or 8 cents per share) of after-tax restructuring and other charges, were 82 cents per share.
The Zacks Consensus Estimate for fourth-quarter earnings was pegged at 82 cents.
Revenues surged 50.7% year over year to $2.81 billion. Excluding the impact of foreign currency and the Scripps Networks Interactive (NASDAQ:SNI), The Enthusiast Network and the Oprah Winfrey Network transactions (collectively called “Transactions”), and foreign currency fluctuations, revenues decreased 2%.
On a pro forma combined basis (if the “Transactions” had occurred on Jan 1, 2017), excluding the impact of foreign currency fluctuations, revenues declined 1% from the year-ago quarter.
Top-Line Details
Distribution revenues (40.9% of revenues) increased 30.4% from the year-ago quarter to $1.15 billion. Advertising revenues (56%) surged 79.7% to $1.57 billion. Other revenues were $86 million compared with $107 million reported in the year-ago quarter.
On a pro forma combined basis (if the “Transactions” had occurred on Jan 1, 2017), excluding the impact of foreign currency fluctuations, Distribution and Advertising revenues increased 1% and 2%, respectively. Other revenues plunged 41% year over year.
U.S. Networks (61.3% of revenues) surged 93% from the year-ago quarter to $1.72 billion. Excluding the impact of “Transactions”, revenues inched up 1%.
On a pro forma combined basis, U.S. Networks' revenues grew 2%. Pro forma advertising revenues increased 3%, primarily driven by continued monetization of digital content offerings and an increase in pricing, partially offset by negative impact of audience declines on the company’s linear networks.
Pro forma distribution revenues increased 1%, primarily due to increases in contractual affiliate rates, partially offset by a decline in overall subscribers.
On a pro forma combined basis, subscribers to Discovery’s fully distributed networks were flat year over year. Total portfolio subscribers in December 2018 were 4% lower than that in December 2017.
International Networks’ revenues (38.6% of revenues) increased 16.9% year over year to $1.08 billion. Excluding the impact of the acquisition of Scripps and currency effects, segment revenues were flat.
On a pro forma combined basis, excluding the impact of foreign currency fluctuations, international networks' revenues remained unchanged year over year.
Pro forma distribution revenue growth was primarily driven by increases in Europe, mostly due to higher pricing and subscriber increases in Latin America, partially offset by pricing declines in Asia. Pro forma advertising revenues were flat, as increases in Europe, mostly due to higher pricing, were offset by viewership declines in Latin America.
Operating Details
In the fourth quarter, adjusted operating income before depreciation & amortization (OIBDA) surged 86.2% from the year-ago quarter to $1.18 billion.
Excluding the impact of the “Transactions” and foreign currency fluctuations, adjusted OIBDA increased 5%. U.S. Networks grew 6%, while international networks rallied 13%.
On a pro forma combined basis, excluding the impact of foreign currency, adjusted OIBDA increased 16%. U.S. Networks’ adjusted OIBDA grew 17%, while international networks’ adjusted OIBDA rose 15%.
Selling, general and administrative (SG&A) expenses soared 40.6% from the year-ago quarter to $679 million. On a pro forma combined basis, SG&A declined 5.8% year over year.
Balance Sheet
As of Dec 31, 2018, cash & cash equivalents were $986 million compared with $531 million as of Sep 30, 2018.
Long-term debt was $15.19 billion, lower than $15.83 billion at the end of the previous quarter.
Free cash flow increased to $888 million as cash flow from operations increased to $929 million, while capital expenditures of $41 million were slightly higher compared with the year-ago quarter’s figure, primarily due to the integration of Scripps Networks.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted 36.02% due to these changes.
VGM Scores
Currently, Discovery has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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 A. 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 this revision looks promising. Notably, Discovery has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Discovery, Inc. (DISCA): Free Stock Analysis Report
Original post
Zacks Investment Research