Has This Network Jumped the Shark?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The term "jumping the shark" started when the successful Happy Days show, after years of every possible plot point, decided to show the "Fonz" waterskiing and literally jumping over a shark. The show went south rapidly.

Here Comes Amish Sharks!

I fear Discovery Channel (NASDAQ: DISCA) is perilously close to jumping the shark despite how much we all love its Shark Week returning August 4 with all things shark. Relying on sharks to save your butt didn't work for Happy Days and may not work for Discovery Channel.

Discovery Channel is the world's largest unscripted content network. Its biggest hits are number one Here Comes Honey Boo-Boo, Gold Rush, Amish Mafia, Hoarders, Breaking Amish, and similarly dysfunctional or outlier lifestyle reality shows. It has a joint venture with OWN, the Oprah Winfrey Network which just inked a $2 million deal for bad girl Lindsay Lohan to get grilled by Oprah. Look for Lohan to star in Here Comes Amish Sharks! (just kidding, no such show).

The ongoing saga of Alana Thompson, aka Honey Boo-Boo, and her self-professed redneck family was the water-cooler sensation of last season with its cringeworthy but occasional heart-warming moments. Especially, the "sketti" episode, in which the family made spaghetti with margarine and catsup. (Reagan was right, it is a vegetable!) The buzz continues with Honey Boo Boo watch-and-sniff cards being distributed in celebrity mags Us and People to be sniffed concurrent to watching the season premiere on July 17.

Yet, shareholders have every reason to cheer the little tyke as Discovery Channel' stock has surged 66.75% this last year. Since the move into reality based programming away from its previous educational PBS-like bent the stock is a seven-bagger since 2009.

However, reality shows like these have their inevitable jump the shark moment. After initial buzz ratings droop and so might the stock. Are there really enough telegenic Amish thugs, smugglers, polygamists, and cupcakery entrepreneurs to sustain and carry the rest of the network's more serious offerings like Inside the Wormhole narrated by Morgan Freeman? (You know it's serious with Morgan Freeman.)

One less promising trend at Discovery is their entry into scripted fictional programming. Reality shows, cheaper to create and popular among women aged 18-49, have been such a winning formula that shareholders should take notice of the change. This move into scripted content makes this a less compelling storyline, adding more risk to this name.

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DISCA Price / Book Value data by YCharts

The company operates in three divisions: US Networks, International, and Education. It owns Discovery Channel, TLC, Animal Planet, Science Channel, Investigation Discovery, Military Channel, Destination America, Discovery Fit & Health, Velocity, and more for a total of over 160 different networks globally with 2 billion plus subscribers in over 220 countries.

International is now the focus at Discovery with better sales growth than domestic; total international revenue growth has been 15%, compared to domestic growth of 5%. Discovery's big news this year was its Nordic Channels purchase getting 12 Scandinavian TV networks from ProSieben Sat. 1 Group for $1.7 billion. It also bought a 20% stake in TF1 Eurosport Group of France, including four French subscriber channels. CEO David Zaslav said both deals would be immediately accretive.

The Nordic Channels will give Discovery fictional content and expand their sports programming footprint with Europsort Group. This is a promising move as ESPN has been a major profit driver, practically the jewel in the crown, for Walt Disney Company's Broadcast division.

Zombies vs sharks vs cutthroats

Discovery's more direct competition may be AMC Networks (NASDAQ: AMCX) with its new reality show lineup to amp up profits. AMC's foray into the genre helps the bottom line. (It's pricey to knock off 70+ zombies per episode of scripted Walking Dead) These include Freakshow (lovable circus freaks live together), Immortalized (a taxidermy competition), Comic Book Men (guys work at a comics store), and Small Town Security (think real life Barney Fife).

Until now, zombies, meth magnates, and morally corrupt ad men had been the main profit divers at AMC. But Breaking Bad ended and Mad Men is going into its final season. Walking Dead, their zombie apocalypse juggernaut, the most-watched drama series in cable history, and The Killing are their remaining scripted winners. AMC Networks also owns WE tv, Sundance Channel, IFC, and IFC films.

Another strong competitor moving more to the reality show model is Scripps Network Interactive (NYSE: SNI) with reality based competition shows like Cutthroat Kitchen to debut August 11 and reality show, Catastrophe Inc.

Scripps owns lifestyle based HGTV, Travel Channel, Great American Country, Cooking Channel, DIY Network, and Food Network. It also publishes magazines and internet content and sells merchandise tied to the networks.

One advantage Scripps has is the loyalty and high disposable income of its viewers helping HGTV and Food Network to generate over 70% of revenues and delighting advertisers. HGTV and Food Network content is watched in 200 million US households but the company also has global ambitions having bought the Asian Food Network this year. International revenues almost doubled from $6.6 million to $11.8 million in Q1 reported in May.

The real(ity) competition

Scripps trades at a trailing P/E of 16.29 and offers a 0.80% yield at a 12% payout ratio. The PEG is 1.47. Discovery is trading at a trailing P/E of double Scripps' at 33.20 but the PEG is lower at 1.14. AMC's PEG shows it's fairly valued at 1.03 and its trailing P/E is 31.94 with a forward P/E of 17.58.

Operating margins are good at these media companies with Scripps' at 39.70%, Discovery's at 40.81%, and AMC's at 28.66%. As you can see from the margins the cost of scripted programming hits AMC.

Analysts expect similar five year EPS growth at Discovery and AMC with 22% and 20% respectively and only 13.58% for Scripps.

Who will jump the shark?

Scripps is the value name here, shareholder friendly with an affluent viewer base and global initiatives. Discovery is the growth name but it worries me with its high P/E although its sports programming and dominant position in non-fiction content should reassure current investors. AMC is looking promising despite its lower margin as it moves more into reality TV.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends AMC Networks. 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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