DISCA/DISCK - Discovery Communications

[sleepydragon]

anyone know this company well?

 

I was looking at this stock today. It seems cheap. 1,736mn LTM pre-tax profit, 18.9 mktcap, so it's trading at around 11x pre-tax. It's pretax profit grew about 15% last year.

 

It has very small capex. It has been buying 1.3bn of stock per year, using all of its OCF. The company has wide moat - own many interesting TV Channels such as TLC, Animal channels, etc.. and these TV channels are popular across culture and other countries... 

 

I read a couple of sell-side researches today. Most are neutral or bearish. It seems the reasons are: 1. valuation is relatively high. 2. high exposure to Advertising (compared to other similar companies), and subscription "outlook" is not good. 3. viewership expected to go down during world cup.

 

This stock is up 350% in 5 years. It was a spinoff.

 

[ItsAValueTrap]

It's part of John Malone's empire.

 

His insider buying and selling suggests that he likes other part of his empire more?

 

However, he's probably extremely happy with his Discovery stake.  (It also happens to be one of his favorite channels.)  He really likes the CEO and struck a deal where he would transfer his voting power to the CEO in case he (Malone) dies.

[sleepydragon]

The founder resigned in March, which is strange. he was only like 60 years old. But I think the CEO has been with the company for a very long time.

Yes, John Malone still own the stock.

Interesting nobody is talking or blogging about this stock.

[saltybit]

The founder wrote a book about the company, in case you are curious about its history.. John Malone plays a cameo

http://www.amazon.com/Curious-Discovery-Entrepreneurs-Story-ebook/dp/B009NFMJOI/

[sleepydragon]

nice! thanks!

[Stevieoopsie]

$28 billion market cap. Morningstar is wrong I think.

[Christopher1]

You arrive at the 28 Bil. market cap considering the preferred stock owned by Newhouse (Miron family entity, they are on the board).

 

The book is informative and there are some interesting windows on the Doctor's thinking (Hendricks use to call John Malone the Doctor).

 

[sleepydragon]

yes. i got the mktcap wrong. hmm, not that cheap any more, but seems still a good company with a lot FCF and moat. May never get cheaper..

[sleepydragon]

I discovered today that Chuck Akre's focus fund bought quite a bit DISCA, in their latest annual report

[thefatbaboon]

Think they bought a small position in Q2 2013 (<1.5% of the portfolio)

[thefatbaboon]

Sleepy,

 

Have you found a good way to treat the content amortization/aquisition?

[gjangal]

If rev's continue growing around 10% this is a decent entry point for long term investors. Good amount of share buybacks, the only negative is high leverage. FCF/Share keeps increasing , 27% FCF/Revenue ratio

 

FCF: $1.5B

Mkt cap: 352mn shares x 67 ~ $23.5B market cap

 

Sleepy,

 

Have you found a good way to treat the content amortization/aquisition?

 

found this in the 10-K

 

"Our largest single cost is content expense, which includes content amortization, content impairments and production costs. We amortize the cost of capitalized content rights based on the proportion that the current year's estimated revenues bear to the estimated remaining total lifetime revenues, which normally results in an accelerated amortization method over the estimated useful lives. Certain networks utilize a straight-line method of amortization over the estimated useful lives of the content"

 

Looks like a mix of accelerated and straight line depreciation.

 

 

[PatientCheetah]

I am surprised by the sizable spread between DISCA and DISCKA. Beside votes, is there any other differences?

[gjangal]

I am surprised by the sizable spread between DISCA and DISCKA. Beside votes, is there any other differences?

 

Yes you are right. DISCK has no voting rights, maybe that's the reason for premium and may stay so. For me personally as a retail investor it makes no difference, so i d rather buy the DISCK shares.

[loganc]

If rev's continue growing around 10% this is a decent entry point for long term investors. Good amount of share buybacks, the only negative is high leverage. FCF/Share keeps increasing , 27% FCF/Revenue ratio

 

FCF: $1.5B

Mkt cap: 352mn shares x 67 ~ $23.5B market cap

 

I apologize for my ignorance as I have done little research here, but could you provide some more detail as to how you get to 1.5B of FCF? 

 

Thanks.

[gjangal]

If rev's continue growing around 10% this is a decent entry point for long term investors. Good amount of share buybacks, the only negative is high leverage. FCF/Share keeps increasing , 27% FCF/Revenue ratio

 

FCF: $1.5B

Mkt cap: 352mn shares x 67 ~ $23.5B market cap

 

I apologize for my ignorance as I have done little research here, but could you provide some more detail as to how you get to 1.5B of FCF? 

 

Thanks.

 

I made a mistake and as per my latest calculations it should be 1.36B , earlier I did a rough calculation of

 

(TTM EBITDA ($2354mn) - Maintenance capex ($117mn))*(1 - 0.33) = $1476mn.

 

My mistake being I did not adjust Changes to working capital and DISCK has consistently high -ve working capital changes. After you asked the question, I went back to look at the details. These are my caluculations

 

Numbers are from latest 10-K. Everything is in millions

 

 

FCF: EBIT - Taxes + Depr & Amortization - Changes in Net working capital - maintenance capex

 

 

EBIT/ Op Income: 1998

 

Provision for taxes: 659

 

Depreciation: 276

 

Content Amortization & Impairment: 1190

 

Changes in working capital: -95 [ Adding this back in the formula below ]

 

Content rights: 1426 [ IMO this should be treated as maintenance capex, based on previous 3 years this has been consistently increasing and they are spending working capital on this. One can argue that this is growth capex, but we don't know what will happen when it stops.  It's up to your judgement ]

 

Property and equipment: 117

 

1998 - 659 + 276 + 1190 + 95 - 1426 - 117 = 1357mn

 

Also when i look at the numbers, FCF is 25% of revenue I like firms that have consistently large percentage of revenue as FCF. Buybacks are great. The high leverage worries me a bit and i need to do some comparisons. I am still doing my research

[loganc]

If rev's continue growing around 10% this is a decent entry point for long term investors. Good amount of share buybacks, the only negative is high leverage. FCF/Share keeps increasing , 27% FCF/Revenue ratio

 

FCF: $1.5B

Mkt cap: 352mn shares x 67 ~ $23.5B market cap

 

I apologize for my ignorance as I have done little research here, but could you provide some more detail as to how you get to 1.5B of FCF? 

 

Thanks.

 

I made a mistake and as per my latest calculations it should be 1.36B , earlier I did a rough calculation of

 

(TTM EBITDA ($2354mn) - Maintenance capex ($117mn))*(1 - 0.33) = $1476mn.

 

My mistake being I did not adjust Changes to working capital and DISCK has consistently high -ve working capital changes. After you asked the question, I went back to look at the details. These are my caluculations

 

Numbers are from latest 10-K. Everything is in millions

 

 

FCF: EBIT - Taxes + Depr & Amortization - Changes in Net working capital - maintenance capex

 

 

EBIT/ Op Income: 1998

 

Provision for taxes: 659

 

Depreciation: 276

 

Content Amortization & Impairment: 1190

 

Changes in working capital: -95 [ Adding this back in the formula below ]

 

Content rights: 1426 [ IMO this should be treated as maintenance capex, based on previous 3 years this has been consistently increasing and they are spending working capital on this. One can argue that this is growth capex, but we don't know what will happen when it stops.  It's up to your judgement ]

 

Property and equipment: 117

 

1998 - 659 + 276 + 1190 + 95 - 1426 - 117 = 1357mn

 

Also when i look at the numbers, FCF is 25% of revenue I like firms that have consistently large percentage of revenue as FCF. Buybacks are great. The high leverage worries me a bit and i need to do some comparisons. I am still doing my research

 

Many thanks.

[sleepydragon]

Chuck Akre increased its DISCA to 4.6% of his portfolio, in the latest 13F filing, as of 3/31/2014

But in his fund's quarterly letter as of 1/31/2014, this holding is already there, which suggests the new DISCA shares were bought between 12/31/2014 and 1/31/2014, when the average price is around $80 and lowest price is $78.99, higher than current price of $73.72

 

 

[sleepydragon]

Can someone explain to me why the DISCK is up 5% today? Why the share dividend is affecting its price today?

And am i right this diluted DISCA holders voting rights, and thus its premium. Can the management actually do this without share holder approvals?? I have DISCA.

It seems to me there's no economic reasons for the share dividends other than that DISCA's voting powers are diluted. I don't buy the "more liquidity" reason given in the press release.

[dwy000]

DISCK doesn't carry a vote so it shouldn't affect or dilute the vote of the A shares - although on a total share count basis the A now represents a smaller proportion of the whole.  In fact, if you own the A shares, because they trade at a higher price than the C shares you could say that as a percentage of your cost base the new share is a smaller dividend than if you owned the C shares. 

 

I'm always amazed that stock splits have such a positive impact on the share price.  You don't own any more of the company than you did before and it doesn't change the enterprise value.

[thefatbaboon]

dwy,

 

I share your amazement regarding splits!  But I even notice with myself that if I own a $120 stock and it goes up or down $12 it always "feels" more significant than a $25 stock that goes up or down $2.5!  It's retarded.  Obviously I know better, and I don't make any investing decisions based on such things, but the emotional reaction is spontaneous and ingrained.

 

sleepy,

 

dwy is right, more C shares have no effect on the voting proportions within DISC as a whole.  On another note, why did you buy the As?  I've never understood the value discrepancy between the A and C shares.  Maybe 1 or 2% (like BRK) but 7% makes no sense to me.  The A shareholder doesn't control DISC, it's controlled by Malone and his B shares (which he has optioned on to Zaslav) and the Newhouse family.  Is there something I've misunderstood?

[sleepydragon]

thanks to you both for your view on this.

the reason I bought disca instead of disck is simple: I am dumb! I should have just bought the c shares. I didn't thought too much about which one to buy. I noticed Akre bought the A shares, and I like to vote on things, so I bought A shares. I didn't check the spread between the two classes of shares, and I didn't think the spread will narrow.

[sleepydragon]

stock is up today, after disca increased buy backs :

http://www.sec.gov/Archives/edgar/data/1437107/000143710714000038/sharerepurchase8-k201405xx.htm

[thefatbaboon]

Been doing some thinking on Discovery. 

 

One of the common arguments supporting a premium valuation for Discovery is that their content can be sold globally.  All you need is a little dubbing and a show about elephants can be sold to the whole world. 

 

I think that's true as far as it goes but I don't think Zaslav has any intention of sticking closely to a narrow interpretation of this niche.

 

1. "As far as it goes" because Discovery isn't driving ratings with BBC-style nature shows.  They are investing in more and more fiction-dramas (is there a name for these?).  And, while a show about elephants can obviously be leveraged across the whole world, can the same be said of "Amish Mafia" type shows?  Also,  these shows have similar finitude to dramas, hot one year and cold the next.

 

2. The SBS buy, the OWN partnership, the Eurosport buy...these don't seem to be the signs of someone sticking around their niche.  SBS is a well-established broadcaster in Scandinavia, OWN is Oprah's latest network and Eurosport is the sports network that currently specializes in sports of limited popularity.  They all seem to have different dynamics than the elephant documentary.  Even with the finest dubbing I don't imagine they're going to be selling Oprah to Norwegians or Ski Jumping to Brazilians.  That said, they still seem like smart, limited risk investments - with a lot of upside potential. 

 

Rather than sticking to the Discovery/Animal Planet niche it looks more like Zaslav is trying to aggressively build a big content company.  I know it's a stretch but does anyone else see a kind of nascent Disney Group (Disney, ABC, ESPN, A+E).  Obviously Discovery is at an early stage in some areas but I see pretty strong outlines of where they are trying to go.

 

Maybe I'm crazy about that Disney stuff, but I still don't think anyone should be justifying their DISC investment on the basis of the global marketability of elephant documentaries.

 

 

[sleepydragon]

WSJ: A New Media Landscape in Sun Valley

http://online.wsj.com/articles/changes-in-media-landscape-to-dominate-conference-in-idaho-1404675325

 

"Discovery Communications Inc.,  whose CEO, David Zaslav, is attending, could be a target or a buyer in a consolidation wave, analysts and investment bankers say. Discovery looked at buying Scripps last year, and recently analysts including Tony Wible of Janney Capital Markets have noted the benefits of pairing Discovery with Disney, a much bigger player that lacks Discovery's international growth."