Bringing Home The Bacon

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Mmmm, bacon!! Discovery Communications (NASDAQ: DISCA) is bringing "United States of Bacon" to your home, a reality food show about outrageous bacon offerings across America. Discovery is the number one non-fiction content provider globally with over 1.8 billion viewers in 209 countries and 45 languages. 

Discovery really has been bringing home the bacon to shareholders the last two years as the stock price has doubled since 2010 and is up 54.37% this year as content is king these days. On December 14, the company announced it would add a billion to its share repurchase program as CEO David Zaslav said on CNBC that, "Our stock is a good value right now."

Smoking The Competition

Discovery has several publicly held and private competitors like Scripps Network Interactive (NYSE: SNI) , Walt Disney (NYSE: DIS), Liberty Media, A&E Television Network and Viacom (NASDAQ: VIA) but the Silver Spring MD based company has been creating interesting content across its many channels: Discovery Channel, TLC, Animal Planet, Science Channel, Investigation Discovery, Military Channel, Destination America, Discovery Fit & Health, and Velocity. 

While Viacom has Jersey Shore for a few more weeks, Discovery has its own show people won't admit to watching," Here Comes Honey Boo Boo", a huge hit for Discovery, which a relative with a graduate degree says she watches only as a "sociological case study." Sure, cuz. This sociological case study was called a "breakout phenomenon" by CEO David Zaslav in the latest conference call. It also has Moonshiners, Gold Rush, and the ever popular Shark Week. The Gold Rush premiere was the big winner among all adult viewers for Friday night drawing more than all other cable and broadcast offerings. Shark Week had its biggest year ever.

Scripps Network and A&E Network are its closest direct competitors as Scripps has the how to channels like Food Network and HGTV and pay DIY Network. According to their last conference call, Scripps is moving more to more reality based shows, like the Discovery model.

Who would have thought a show about Amish young adults amid the bright lights in the big city (NYC to be exact) would be Discovery's biggest show in a decade attracting 3 million viewers? The network decided to follow it up with Amish Mafia, two words I never thought I'd see together. Critical response has been scathing but likely it will have a respectable viewership. These offbeat reality shows are not only cheaper than scripted content but are occasionally beating major networks on viewership.

Speck, Lard, Pancetta

Discovery is also bringing home the speck, lard, pancetta, it's all bacon, from other countries by buying Nordic Channels consisting of 12 Scandinavian TV networks from ProSieben Sat. 1 Group for $1.7 billion and also bought a 20% stake in TF1 Eurosport Group of France and includes four French subscriber channels.

As its largest acquisition to date, can Discovery digest this more easily than the Barrie Burger, a chunky peanut butter bacon burger featured on United States of Bacon? According to CEO Zaslav in a December 14 interview on CNBC both will be immediately accretive. Also, he added the Nordic Channels will give them fictional content for the first time and expand their sports programming footprint along with Europsort Group. The market liked the news and the stock closed up.

Zaslav said the international margins are close to 50% and on the Q3 conference call on November 6 predicted that international was going to be the big profit driver going forward and is their top strategic priority. Most importantly, international is outpacing domestic growth, and he added, "With subscribers growing across the globe, we are delivering broad-based affiliate revenue growth with every region this quarter, delivering double-digit gains versus a year ago."(from Seeking Alpha transcript)

Cutting Through The Fat

After four consecutive quarters of beating estimates that Q3 quarter disappointed and CFO Andy Warren explained that the comparison to the year ago quarter was skewed because of big upside from a Netflix content deal in Q3 of 2011. He supported the international strategy saying total international revnue growth was 15% compared to domestic of around 5%. The company still lowered guidance for the rest of 2012.

Margin compression has been an issue as they've been promoting some of the newer channels like ID (Investigation Discovery) but the profit margin still stands at 23.66%. Analysts from Lazard, Nomura, and UBS believe growth will still be robust but not as much as anticipated as international ad growth in regions of Europe and Asia didn't meet expectations.

Overall, analysts expect 18.71% growth over the next five years per annum. Discovery is trading at a higher P/E of 22.23 than competitors Scripps at 17.66 and Viacom at 14.58. Return on equity is 16.84%.

The company has been conservative on its ad spend and has only been supporting its most promising channels, for example, dropping Planet Green and turning it into Destination America. Also, as analysts asked on that call about M&A Zaslav said they were waiitng for purchases only if they were the right price and hinted most likely international. With Eurosports and the Scandinavian channels the final question is it time to bring home Discovery?

Bring It On Home

Discovery has really gained viewers with the variety of their content across all demographics from animal lovers to foodies to sociological voyeurs and mystery fans; women and men of all age groups. While they can't compete with Disney on sports domestically, now they can overseas and the foray into scripted content is promising.

Discovery is managing its programming mix very well, cutting losers, backing winners, and keeping cash ready for opportunities. Its projected growth rate is higher than Scripps and the new purchase is encouraging. No matter what, there is something for just about anyone. How can you not love a network with a show about bacon, anyway?

leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Scripps Networks Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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