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Why Is Discovery (DISCA) Up 3.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Discovery Communications (DISCA). Shares have added about 3.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Discovery due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Discovery Q3 Earnings Beat Estimates, Revenues Up Y/Y

Discovery reported third-quarter 2019 adjusted earnings of 87 cents per share that beat the Zacks Consensus Estimate by 4.8% and increased 10.1% year over year.

Revenues increased 3.3% year over year to $2.68 billion and beat the consensus mark by 0.1%. Excluding foreign exchange impact, revenues increased 5%.

The year-over-year growth was driven by an increase in advertising (52.8% of revenues) and distribution (44.8% of revenues) revenues.

Top-Line Details

Advertising revenues grew 3.5% year over year to $1.41 billion. Distribution revenues increased 4.3% from the year-ago quarter to $1.20 billion.

Other revenues were $64 million, down 14.7% from the year-ago quarter.

U.S. Networks (64.4% of revenues) revenues rose 3% from the year-ago quarter to $1.73 billion. Advertising and distribution revenues were up 2.8% and 5.7%, respectively.

The advertising growth was driven by increases in pricing and continued monetization of digital content offerings and inventory. The growth in distribution revenues was driven by increased contractual affiliate rates and additional carriage on streaming platforms.

Per Nielsen, Discovery had the #1 most watch TV portfolio for “women 25-54” in the United States for the past six months.

Moreover, TLC was the #1 ad-supported cable network in primetime among “women 25-54” and “women 18-49,” with delivery up 16% and 10%, respectively.

Notably, Discovery launched Food Network Kitchen in collaboration with Amazon in the United States.

International Networks revenues (35.5% of revenues) rose 3.7% year over year to $950 million. Advertising and distribution revenues were up 5.3% and 2.4%, respectively.

However, excluding foreign exchange impact, International Networks revenues grew 9%, as advertising revenues increased 10% and distribution revenues 8% on a year-over-year basis.

The advertising growth was driven by contribution from the UKTV Lifestyle Business, expansion of digital content offerings and increased prices in certain European markets.

Moreover, the growth in distribution revenues was driven by contractual price increases and new channel launches in the Latin America region. Additionally, higher digital licensing revenues and growth in Europe owing to increases in pricing and monetization of digital content offerings drove the top line in the reported quarter.

Operating Details

In the third quarter, selling, general and administrative (SG&A) expenses decreased 1% from the year-ago quarter to $660 million.

Adjusted operating income before depreciation & amortization (OIBDA) increased 6.2% from the year-ago quarter to $1.13 billion. Excluding foreign exchange impact, OIBDA grew 9%.

U.S. Networks adjusted OIBDA rose 11.5% from the year-ago quarter to $1 billion. However, International Networks adjusted OIBDA declined 6.7% from the year-ago quarter to $237 million. Excluding foreign exchange impact, adjusted OIBDA increased 5%.

GAAP operating income surged 67.8% year over year to $619 million.

Balance Sheet

As of Sep 30, 2019, cash & cash equivalents were $813 million compared with $1.32 billion as of Jun 30, 2019. Moreover, as of Sep 30, long-term debt was $14.76 billion, lower than $14.82 billion as of Jun 30.

Free cash flow was $884 million, up from $596 million reported in the previous quarter.

Discovery repurchased nearly 12 million shares for $300 million in the reported quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Discovery has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 has been net zero. Notably, Discovery has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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