Discovery: A Value Stock with Attractive Expected Growth

Discovery (NASDAQ: DISCA) is a media company that engages in the provision of content across distribution platforms and digital distribution arrangements.

It operates through the following segments: U.S. Networks, International Networks, Education and Other, and Corporate and Inter-segment Eliminations. The company was founded in 1982, and is headquartered in Silver Spring, Maryland.

I am bullish on DISCA stock. It is a value stock with expected EPS growth that is attractive. Shares of Discovery have losses of approximately 20% in 2021, making them attractive now not just because of their price but due to several factors, with pending approval of WarnerMedia’s acquisition business a key catalyst to revenue growth.  

Discovery Business News

Discovery announced on December 22 “that the European Commission (EC) has granted unconditional antitrust clearance of the Company’s proposed acquisition of AT&T Inc.’s (NYSE:T) WarnerMedia business.”

“Approval from the European Commission is a key milestone toward completing our proposed transaction with AT&T,” said David Zaslav, president and CEO of Discovery, and the future CEO of the combined company. “Today we move one important step closer to creating Warner Bros. Discovery, a premier entertainment company that will be one of the world’s leading investors in premium content and one positioned to serve consumers with what we believe will be the most complete content offering under one roof.”

The official closing of the WarnerMedia transaction is expected to finalize in mid-2022.

On the negative side of news, Poland announced a media bill that is limiting foreign ownership of media, restricting media freedom. The EU has expressed its concern over this, and Discovery has issued a statement opposing to the news.

“The outcome of today’s surprise vote in the Polish Parliament should alarm any enterprise investing in Poland and anyone who cares about democracy and freedom of the press. Through this vote, Poland undermines the values that have connected Poland with Europe, and uproots the foundation of the Polish-American relationship. We now appeal to the President of the Republic of Poland, Andrzej Duda, to keep his word and veto this legislation.”

It is important to mention that in Poland, channel TVN24 is owned by Discovery.

Mixed Q3 Results

Discovery reported a beat on EPS GAAP and revenue in Q3 2021. GAAP EPS of $0.24 was a beat by $0.10 and revenue of $3.15 billion was a beat by $7.07 million.

Year-over-year Discovery reported a 23% increase in revenue, 48% decline in net income, 45% decline in diluted earnings per share, and 10% decline in free cash flow.

Discovery also reported that it ended Q3 with 20 million DTC Subscribers, an increase of 3 million subscribers since the end of Q2, and generated $425 million of Next Generation Revenues, a growth of about 100% versus the prior-year quarter.

Fundamental Insights

DISCA witnessed increased volatility in Q3 2021, and the operating margin according to MorningStar has declined in 2020 to 25.6%, from 28.6% in 2019. On a TTM basis, it has declined further to 17.2%.

The D/E ratio of 1.24 as per the latest quarter has been steadily declining, as Discovery is strengthening its balance sheet.

The 10-year average growth for revenue, net income, and EPS is 10.96%, 6.44%, and 9.07%, respectively. It is predictable and sustainable revenue and earnings growth.

Valuation

Upcoming earnings are a key catalyst to move stocks, and Discovery is no exception. A stock screener can provide useful insights into why DISCA stock is a value stock now.

Data from Simply Wall Street shows that DISCA stock is attractive based on its P/B Ratio (1.4x) compared to the U.S. Media industry average (2x), and based on its P/E Ratio (13.1x) compared to the U.S. market (17.1x).

According to Zacks, the expected EPS growth over the next three to five years is 11.06%, and the stock has a forward P/E of 8.82, and a PEG ratio of 0.80. I do not consider it as a value trap, but I see very attractive valuation and growth that could accelerate with the WarnerMedia merger.

Wall Street’s Take

Discovery has a Moderate Buy consensus rating based on four Buys and four Holds assigned in the past three months. The average Discovery analyst forecast of $35.29 implies 44% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.