DISCA/DISCK - Discovery Communications

[ItsAValueTrap]

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. 

 

The book Curious Discovery talks about how Oprah's network came to be.  They needed to do something with the predecessor network to OWN since its economics weren't working out well.  So they took that channel and simply switched it over to Oprah.

 

Cable channels are mostly about first mover advantage.  Once somebody dominates the niche, its hard for other people to take over that niche.

[smd123]

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

 

How did you arrive at -95 for the working capital change? What did you consider as working capital?

[gjangal]

2013 10-K Cash flow statements have the line items for working capital in detail. Summing them up will give you the number.  I treated content acquisition costs as maintenance capex as described in the post and excluded that from changes in WC calculation. The 10-k has more details on how they amortize content costs etc.

 

[smd123]

2013 10-K Cash flow statements have the line items for working capital in detail. Summing them up will give you the number.  I treated content acquisition costs as maintenance capex as described in the post and excluded that from changes in WC calculation. The 10-k has more details on how they amortize content costs etc.

 

Thanks a bunch!

 

 

[CorpRaider]

Discovery Founder is launching a streaming "clone" today. 

 

http://www.capitalnewyork.com/article/media/2015/03/8564273/discovery-channel-founder-enters-streaming-fray

[rico1181]

This may be a dumb question. Does anyone know why the OIBDA margins in the international networks segment so low? For 2014, US OIBDA margins are at 57% vs. 36% in the Intl. segment. This seems like a big differential given that Discovery is able to leverage its content produced for the US market  internationally without incurring any significant costs.

 

Also, I would appreciate if someone can comment on the reasonableness of my FCF calculation equation for DISCK. FCF = OIBDA - Capex - Content acquisition cost (from CF statement) + Depr. + Content amortization & impairment - Cash Interest - Cash Taxes. Using this equation, I get close to the FCF number reported (CFO - Capex) in management presentations. However, over a 5-year period, my FCF calculation amounts to $5.7 billion vs. management's ~$5.1 billion. Any thoughts?

[CorpRaider]

Not sure.  I do know that they've invested significantly in sports content over there which is not part of the model in the U.S. to my knowledge.

[Nnejad]

If you look at margins over time, you should two things:

1) a steady increase in international margins, occasionally interrupted by..

2) acquisitions of lower margin businesses, i.e. SBS Nordic and then Eurosports, which cause a step change down in terms of margins.

 

Looking past these acquisitions, margins have been steadily creeping up.

 

Regarding your FCF calc, I get what you're trying to do, but I think you may be double counting depreciation, at least, as you're starting with OIBDA.

[rico1181]

Thanks, Nnejad.

 

Your comments on margins make sense to me. I included depreciation in the equation by mistake. However, I didn't double count depreciation in my FCF calculation. Does the FCF calculation make sense to you otherwise? Any thoughts on DISCK's current valuation would be much appreciated.

 

TIA.

[ItsAValueTrap]

This may be a dumb question. Does anyone know why the OIBDA margins in the international networks segment so low? For 2014, US OIBDA margins are at 57% vs. 36% in the Intl. segment. This seems like a big differential given that Discovery is able to leverage its content produced for the US market  internationally without incurring any significant costs.

 

Also, I would appreciate if someone can comment on the reasonableness of my FCF calculation equation for DISCK. FCF = OIBDA - Capex - Content acquisition cost (from CF statement) + Depr. + Content amortization & impairment - Cash Interest - Cash Taxes. Using this equation, I get close to the FCF number reported (CFO - Capex) in management presentations. However, over a 5-year period, my FCF calculation amounts to $5.7 billion vs. management's ~$5.1 billion. Any thoughts?

 

Discovery is expanding internationally and trying to get more channels started up overseas.

 

With Netflix is different than Discovery, they are also expanding internationally and making less money internationally than in the US.  In general, all of these content bundling companies lose a lot of money in the beginning.  It takes a few to several years to start breaking even before making money.

 

2- A lot of Discovery's primetime slots are going to reality shows, which don't always do well internationally.  If Discovery shifts into scripted, it may do better internationally with scripted content.

 

3- In my opinion, Oprah Winfrey Network and Eurosport are huge sources of hidden value.  OWN started to break even and should be getting more profitable.

 

Eurosport is a nice asset and more resilient against over-the-top.  Right now, consumers are paying for direct-to-consumer/over-the-top Eurosport subscriptions.

[merkhet]

Discovery looks rather cheap at these prices given growth and buybacks.

[CorpRaider]

Yeah, I keep sniffing around it too.  I think I haven't bought any because: 1)  Potential death of bundle scares me a little w/r/t their content; 2) Malone looking to sell out to CEO; the guy doesn't usually sell stuff (this may be lack of information/my ignorance about the proposed structure); 3) founder guy launching competing/similar streaming service; 4) Voting rights structure. 

 

I generally avoid odd voting rights structures like the plague.  Captain obvious here:  By definition they divorce the incentives of the (purported) economic rights from the voting and control rights of the shareholder base.  Yeah I'd love to own GOOG and Newscorp, but I'm skeered the other shareholders (including non s/h who might want to get involved) can't do anything to stop Rupert from pulling  a "myspace" with the WSJ and killing it or stop Brin and Page from "investing" all those search profits in google glass and driverless cars, etc...

 

Not cool man....not cool at all.

[merkhet]

Fair points, but I think (2) is a non-issue. It's mostly structured to give Zaslav control of the company.

[ItsAValueTrap]

3) founder guy launching competing/similar streaming service

 

I'm not sure that his streaming service will be that similar.  Discovery has been moving away from its roots by airing fake documentaries about how mermaids exist today, how a 50-ton dinosaur shark (the megalodon) might exist today, etc.  TLC, formerly the learning channel, has very little to do with learning.  It is mostly women's reality programming.

 

Discovery will be moving more heavily into scripted.  Where Discovery is headed, I don't think that they will compete in the same niche as Hendricks.

 

Discovery's Internet TV strategy seems to be betting on TV everywhere.  They hope that cable companies will get their act together and put together a compelling TV everywhere interface.  (Personally I think that Netflix will beat out TV everywhere.  TV everywhere won't work well because the cable guys won't co-operate with each other, especially when some of them are part of bigger companies that also own content companies which leads to conflicts of interest.  The partners won't trust each other and won't trust their frenemies.)

 

can't do anything to stop Rupert from pulling  a "myspace" with the WSJ and killing it or stop Brin and Page from "investing" all those search profits in google glass and driverless cars

It's highly unlikely that Malone will allow that to happen.

 

It's far more likely that Malone will self-deal to the detriment of shareholders, which has kind of happened multiple times in the past.

[CorpRaider]

Yeah, thanks for the responses.  The transition to more scripted is interesting because I thought the whole purported sustainable competitive advantage was "we can take this infotainment and move it across language and culture with little to no costs and it will play/translate."  I'm not sure "My 600 lb life" will translate culturally to Africa and southeast asia.  haha.

 

I'm not totally comfortable with Malone either.

 

I do think it is interesting though.  I'm intrigued by the education content business too.

[ItsAValueTrap]

Yeah, thanks for the responses.  The transition to more scripted is interesting because I thought the whole purported sustainable competitive advantage was "we can take this infotainment and move it across language and culture with little to no costs and it will play/translate."  I'm not sure "My 600 lb life" will translate culturally to Africa and southeast asia.  haha.

 

I think their sustainable competitive advantage is David Zaslav.  But if he leaves... it might be tough finding somebody who is as good as him.

 

Discovery is looking to get more into scripted drama.  Some scripted dramas do very well internationally across all cultures.  Maybe not the Oprah network stuff, which might not do well with non-black audiences.  But in general, all of the big network shows do really well internationally (that's partially because they have big budgets).

 

I think Netflix may put a beatdown on a lot of the cable channels out there.  Internet TV will be technically superior in every way.  Over the next several years, I think malone will try to trade/sell Starz (he already swapped his own shares for LGF), home shopping network, and then maybe discovery.

[krazeenyc]

Anybody have an idea if DISCA and DISCK are considered substantially identical as far as the IRS is concerned.

 

I'm considering taking a hedged position in DISCK but the furthest options expiration on DISCK is Mar 2016. DISCA on the other hand has leaps that expire Jan 2017. I'm wondering if I bought DISCK and bought some DISCA puts if it would be considered a married put situation.

[ItsAValueTrap]

Anybody have an idea if DISCA and DISCK are considered substantially identical as far as the IRS is concerned.

 

I'm considering taking a hedged position in DISCK but the furthest options expiration on DISCK is Mar 2016. DISCA on the other hand has leaps that expire Jan 2017. I'm wondering if I bought DISCK and bought some DISCA puts if it would be considered a married put situation.

 

The spread between DISCA and DISCK does fluctuate wildly.  So you could argue that they aren't substantially identical?  If they were substantially identical (like a deep in the money option versus the stock), the spread between the substantially identical securities would be fairly constant.

[Jurgis]

Anybody have an idea if DISCA and DISCK are considered substantially identical as far as the IRS is concerned.

 

I'm considering taking a hedged position in DISCK but the furthest options expiration on DISCK is Mar 2016. DISCA on the other hand has leaps that expire Jan 2017. I'm wondering if I bought DISCK and bought some DISCA puts if it would be considered a married put situation.

 

The spread between DISCA and DISCK does fluctuate wildly.  So you could argue that they aren't substantially identical?  If they were substantially identical (like a deep in the money option versus the stock), the spread between the substantially identical securities would be fairly constant.

 

Unless someone is CPA experienced with this sort of thing, I'd take people's responses here with a huge pile of salt.

 

I'm not a CPA. :)

 

I'll claim that DISCA and DISCK are definitely substantially identical.

 

Of course, IRS most likely won't audit you, so it's your choice really. :)

[ItsAValueTrap]

Anybody have an idea if DISCA and DISCK are considered substantially identical as far as the IRS is concerned.

 

I'm considering taking a hedged position in DISCK but the furthest options expiration on DISCK is Mar 2016. DISCA on the other hand has leaps that expire Jan 2017. I'm wondering if I bought DISCK and bought some DISCA puts if it would be considered a married put situation.

 

The spread between DISCA and DISCK does fluctuate wildly.  So you could argue that they aren't substantially identical?  If they were substantially identical (like a deep in the money option versus the stock), the spread between the substantially identical securities would be fairly constant.

 

Unless someone is CPA experienced with this sort of thing, I'd take people's responses here with a huge pile of salt.

 

I'm not a CPA. :)

 

I'll claim that DISCA and DISCK are definitely substantially identical.

 

Of course, IRS most likely won't audit you, so it's your choice really. :)

 

Well yeah you should really talk to a tax lawyer or tax accountant.  Don't take what I said too seriously.

[Ross812]

Anyone notice disca/k tanked with Disney today? 13.5x fPE, PEG is at 0.85 . The market seems spooked by the fall in video revenue with ESPN. I've never seen it much cheaper...

[Jurgis]

Right. I hold both STRZA and DISCA. I am thinking of switching from STRZA to DISCA. STRZA was much cheaper than DISCA last year - not anymore. And DISCA seems to have better properties and better financials.

[thefatbaboon]

Anyone else think Discovery would fit nicely with TWX?  Very global brands.  It's an tidy little bundle, particularly for non-US markets (who don't care about the Disney and Fox US sports properties).

 

HBO, Discovery, CNN, Cartoon Network, Animal Planet, Eurosport

[thefatbaboon]

Another question:

 

There's been a lot of concern regarding Discovery's weakness in an OTT world.  The idea being that Discovery/Animal Planet is one of those things that is nice in a bundle but that people aren't going to want to subscribe to.

 

There's also been a lot of comment about Netflix and Amazon creating tremendous subscriber businesses.  And talk of HBO being a tremendous brand, an exceptional property that one should or could build "a netflix" around.

 

I'd like to play devils advocate.  That what Netflix and Amazon excellent original programming is increasingly demonstrating is that the brand HBO, Showtime or whatever is increasingly worthless.  Quality production can be bought, delivered to a global audience over the top, and capture a massive loyal subscribing following very fast indeed.

 

Perhaps the Discovery Channels, QVC, Home Shopping Network, Nat Geo, History Channels, of this world etc are better positioned for the new world?  Easier to manage.  Their businesses are not so hit based.  Sure maybe ad sales may weaken but ultimately their content investments and viewership trends should be much less volatile and i'm sure the big streamers like Amazon or Netflix will be very happy to fold in some of this (relatively inexpensive) "non-fiction" content.  The massive scripted series are going to go at each other like the movie studios of old, spending and spending, lurching between hits and flops.

[Jurgis]

The massive scripted series are going to go at each other like the movie studios of old, spending and spending, lurching between hits and flops.

 

I agree with this.

 

And I think this is a risk with Netflix (not that Netlix is being discussed as investment here, so this is OT): the huge cash drain on making the content.