Discovery Discovers Flat Growth
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It happens to every decent company sooner or later; a period of healthy growth slows to a time of flat results. Such is the case with cable TV concern Discovery Communications (NASDAQ: DISCA). It’s just announced 4Q and full-year 2011 results and they’re splendid, with lots of double-digit pluses (or near enough) in the year-on-year growth column. Net profit was way up (almost 70% to $1.1 billion), total revenue grew 12% to $4.2 billion, domestic advertising increased 9% and -- because this is an admirably well-globalized company -- its foreign counterpart a robust 22%. US distribution revenue clocked in 12% higher, foreign distribution improved 14%, etc. etc. etc.
But investors weren’t happy, trading the stock down 81 cents on the day to push it down to $44.94. Guidance was the reason why. After several pages detailing the happy 2011 results in the earnings release, there were terse words about the future: the company expects a top line of $4.45 billion–$4.58 billion and net profit of $975 million-$1.1 billion for fiscal 2012. In other words, it anticipates growth of no more than 8% for revenue, and less net profit even at the very top end of the range.
It’s not only the uninspiring guidance. DISCA is one of the better media stocks out there, and investors know it and have traded it accordingly in the past. Its blend of science/nature documentary with touches of reality TV has proven a potent mix with a loyal viewership that regularly tunes into its offerings such as MythBusters and Deadliest Catch. Its programming is focused and identifiable, hence easy to sell advertising for. As a company it’s also got a tight focus, operating almost exclusively in the cable space here and abroad. This is in contrast to a firm like Comcast (NASDAQ: CMCSA), which is a cable provider on one side, a cable channel operator on the other, and the majority owner of a traditional TV network (NBC) in the middle. Or a cross-media entity like Time Warner (NYSE: TWX) which juggles film production and distribution, TV, cable providing, magazines, radio… basically, anything people can watch, read or listen to. DISCA’s focus and strong, tight branding are major reasons why even after today’s decline it sells at a premium to its peer group. Specifically the stock trades at just over 18 times forward earnings compared to 13+ for both Time Warner and DISCA’s fellow cable channel operator Scripps Networks Interactive (NYSE: SNI), which offers similar although less flashy docu/reality programming slotted in different niches (home improvement, food and travel).
But the model that has served Discovery so well up until now might be getting a little old. The company keeps copying the MythBusters and Deadliest Catch docu-ality formula for its new shows, risking audience (and hence advertiser) fatigue. It also made a big, seemingly safe gamble when it put up $200+ million for half of the Oprah Winfrey Network. Hey, everything Oprah does turns to gold, right? Well, not in the case of her TV channel, which has so far produced neither a hit show nor good audience numbers. A decent return on that investment likely won’t happen anytime soon, if at all, and the company intends to keep pumping money into the venture.
Despite these negatives, Discovery still has a lot going for it. The company’s going to need more, however, if it’s going to successfully grow its business in the future. Otherwise, investors will keep punishing it on the stock market.
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