DISCA/DISCK - Discovery Communications

[muscleman]

I've been going over the 2015 Investor Day slides since Malone's comments on Discovery in his interview with David Faber. He specifically stated that he favored it over his stake in Charter.

 

Interview: http://video.cnbc.com/gallery/?video=3000452809&play=1

 

Investor Day slides attached. They're also an incredibly good overview of the international market.

 

At about 40:00, Malone was asked about the OTT thread. The operator said "They are coming". Malone said the mini bundles will likely increase cable operator margins. But he didn't say how this will impact programmers. Later when asked about DIS and ESPN, he said he is not seeing that kind of sub drop for DISCK. So it is still a bit unclear to me how OTT will threat the programmers.

He did say though that he believes this will be a long term gradual change.

 

So do you think DISCK is a long term investment like the cable assets, or it will likely be a shorter term investment based on the "perfect storm"?

[gjangal]

yeah you are right, you can subtract ~350mn for interest expense to arrive at fcf available to shareholders . My main argument of revenue growth continuing to grow at high single digit to ~10% didn't materialize making this a questionable timing on the investment. 

 

Malone's thoughts on the current industry landscape is pretty interesting in the video you posted. He thinks that distributors are worried about being commoditized and want to acquire content producers. Content producers can benefit by access to capital to produce content as its a risky business with hits and misses. It appears to me that he is suggesting that cable companies will be on the lookout to acquire content companies.

 

 

[muscleman]

yeah you are right, you can subtract ~350mn for interest expense to arrive at fcf available to shareholders . My main argument of revenue growth continuing to grow at high single digit to ~10% didn't materialize making this a questionable timing on the investment. 

 

Malone's thoughts on the current industry landscape is pretty interesting in the video you posted. He thinks that distributors are worried about being commoditized and want to acquire content producers. Content producers can benefit by access to capital to produce content as its a risky business with hits and misses. It appears to me that he is suggesting that cable companies will be on the lookout to acquire content companies.

 

I think revenue growth is mostly hammered by currency movements. Without that, it should have been high single digit to 10% right? So it seems like you are still correct.

 

I think aggregators may get commoditized. There would be no difference between NFLX and Amazon Prime if they offer the same content. But distributors provide internet access to the websites. I haven't seen that being commoditized yet. I view the cable operators more like real estates.

 

 

[muscleman]

http://www.barrons.com/articles/discovery-communications-encompasses-uncertainty-1469008951

 

What do you guys think of this article?

You can google the title and then view the full article.

Is there a place where I can check the channel ratings? I googled but can't find much to validate the assertion here that the rating is going down.

[glorysk87]

http://www.barrons.com/articles/discovery-communications-encompasses-uncertainty-1469008951

 

What do you guys think of this article?

You can google the title and then view the full article.

Is there a place where I can check the channel ratings? I googled but can't find much to validate the assertion here that the rating is going down.

 

Jefferies puts out a piece every few weeks that details ratings changes. I've attached one. It's more helpful when you read them regularly so you can see how things are trending, but it's better than nothing.

20160629_-_Ratings_Rundown_Jefferies_-_22_pages.pdf

20160629_-_Ratings_Rundown_Jefferies_-_22_pages.pdf

[dwy000]

http://www.barrons.com/articles/discovery-communications-encompasses-uncertainty-1469008951

 

What do you guys think of this article?

You can google the title and then view the full article.

Is there a place where I can check the channel ratings? I googled but can't find much to validate the assertion here that the rating is going down.

 

you can also get daily/weekly numbers at http://tvbythenumbers.zap2it.com

[muscleman]

http://www.barrons.com/articles/discovery-communications-encompasses-uncertainty-1469008951

 

What do you guys think of this article?

You can google the title and then view the full article.

Is there a place where I can check the channel ratings? I googled but can't find much to validate the assertion here that the rating is going down.

 

Jefferies puts out a piece every few weeks that details ratings changes. I've attached one. It's more helpful when you read them regularly so you can see how things are trending, but it's better than nothing.

 

Thank you! Could you tell me where you find these docs?

I can't understand the household and Target demo. What do they mean? Year over year drop of 10-12% seems bad to me. Are all these channels being challenged so hard by Netflix?

[muscleman]

I exited the position as I find it hard to grasp the future of these cable channels.

In one of the Malone interview, when asked about OTT competitions and skinny bundles, Malone said it would actually be raise margin for the distributors, which I agree. It increases the needs for high broadband usage. But for aggregators, I find it hard to tell what will happen next.

[glorysk87]

I exited the position as I find it hard to grasp the future of these cable channels.

In one of the Malone interview, when asked about OTT competitions and skinny bundles, Malone said it would actually be raise margin for the distributors, which I agree. It increases the needs for high broadband usage. But for aggregators, I find it hard to tell what will happen next.

 

The way I think of it, the content creators that will succeed will be the ones who offer the best value to MVPDs.  The way I think of value is two-fold:

 

A) How in-demand are the channels they offer (you can measure this via ratings, consumer ranking surveys, etc)

 

and

 

B) How much does it cost an MVPD to carry the channels (this can be measured by looking at affiliate fees per channel).

 

The channels that have the highest ratings and lowest affiliate fees are the ones that offer MVPD's the highest value.

 

This was a large part of my thesis on SNI when it cratered down to the high $40's late last year.  As for DISCA, I haven't done the analysis on it, but that's the way I would look at it if I were you.  High value channels will find their place on skinny bundles and on regular bundles.

[muscleman]

https://www.sec.gov/Archives/edgar/data/1437107/000143710716000082/a20160630-exhibit991pressr.htm

 

Why does DISCK pay a lower tax on a higher net income? I am confused. There is no explanation.

[muscleman]

I see in both VIC and Punch card investing that there is a TWX short thesis and a discovery long thesis. But I can't understand why they are different in facing OTT threats.

In addition, I see Discovery Go's review is really bad compared to HBO now and Netflix.

https://play.google.com/store/apps/details?id=com.discovery.discoverygo&hl=en

 

Could anyone share their thoughts?

[muscleman]

http://seekingalpha.com/article/4017657-discovery-communications-disca-q3-2016-results-earnings-call-transcript?page=9

 

Does anyone know what this means? Does this mean 5% of the monthly video subscription fee goes to DISCK?

 

 

"When we did the deals eight years ago, seven years ago, five years ago, we were getting about 5% or 6% share, and we were getting 4% or 5% of the money. Our share went up to 12% or 13%."

 

 

 

"The second thing is we've already gone directly to consumers with Discovery Go, which is going very well so far. And as I said, 50% of the people that are spending time with Discovery Go are under 34 and about 40% are under 25. "

 

Oh really? Check the number of reviews in app stores. 929 ratings for iOS and 2501 for Android????? There are 3 million reviews for NFLX Android app.

 

 

https://play.google.com/store/apps/details?id=com.discovery.discoverygo&hl=en

https://itunes.apple.com/us/app/discovery-go/id1039067950?mt=8

[muscleman]

Does anyone know why the CFO Andy Warren is leaving?

 

[Spekulatius]

Does anyone know why the CFO Andy Warren is leaving?

Andy Warren went to STX(?), a private media company. There is not much talk here about DISCA, probably because he stock has been flat. It looks to me, that the currency impacts have masked a lot of organic growth and at some point this should abate. I like the fact, that they can reduce their cash taxes with Solar projects (mid teens IRR) and hope that they get this right. Overall, with ~12% of the viewership and only 6% of the transmission fees, they have catching up to do, so I think they would be OK, even if cordcutting accelerates. I really like their Eurosport acquisition, this is a strong brand in Europe and I feel can be monetized better. The stock is a cannibal as well, buying back about 5%+ of the outstanding shares every year. It looks like they will turn down their buybacks a bit, due to cash expense from solar investment, but as long as they are getting a good cash return on those, I don't mind. it's the one Malone company that is still reasonably valued and a good business as well.

[cookies]

Anyone have any thoughts on this one?  2 specific questions:  Capital IQ has share count at 580mm; I get to 538mm: A common: 153mm; b common: 6.5mm; c common: 224mm; a pref converts to 71mm of A; b pref converts to 7mm a common; and c pref converts at 2:1 into 76mm of C common.  Add those up i get to 538mm shares which implies 13.9bn mkt cap and the biz does ~1.3bn of owner cashflows.

 

Not sure but given all the over the top competition (ATT with DirecTV; sling; etc) it seems to me content is getting more valuable.  Also these guys produce content at much lower costs (think 1/8 - 1/10th the per hour cost) as the sets are mostly free and the actors (sharks, bears, iguanas) don't charge them any money.

 

They are buying back maybe 8-9% of their shares annually and trading at around a 9% FCF yield.  I like it for 15% ish returns over 5 yrs and potentially higher if they start getting better pricing for their content which is a possibility.

 

More generally, I find what is happening in wireless / content / cable / 5g fascinating and wish I had some better resources, any recommended reading very appreciated.

 

 

[Spekulatius]

My thought is that this is a once great business with increasing headwinds. The cord cutting rate appears to be accelerating and stands currently at 4% annually.

I have cut the cord in our household and found they nobody cared, since everyone was watching mostly streaming services or YouTube.

 

It is very hard to grow the business if you lose 4% of your customers annually. The TV entertainment is just not as relevant any more as it used to be. I sold my DISCK shares, but kept some SNI and FOXA since I have some gains on them (My DISCK shares were more or less flat)

[Jurgis]

Couple anecdotal observations and thoughts:

 

- IMO, the world is awash in too much content. BTW, this is not just about DISCA. I have the same opinion about Netflix/Amazon/Disney/etc. Does not mean that content companies can't make gigabucks. Might mean that competition is bigger than people expect. DIS is making nature movies now too: DisneyNature Born in China.

- Non-fiction library value is less than fiction library value. DISCA might have brand, but while people rent and watch 10 year old movies, they don't much rent and watch 10 year old nature documentaries.

- I think DISCA is pushing a lot into international markets. This might still be somewhat of tailwind, but I can't quantify how much.

 

I still hold my shares. I also hold some LGFB. Liberty pieces that haven't gone up recently and might be somewhat cheap (for a reason).

[Liberty]

Discovery and Scripps reportedly rekindle merger talks

http://www.cnbc.com/2017/07/18/discovery-and-scripps-reportedly-rekindle-merger-talks.html

[Spekulatius]

Yeah, the thread was revised in a timely manner. I sold my SNI shares with a decent gain and I am not complaining.

[Liberty]

https://www.cnbc.com/2017/07/31/discovery-communications-to-buy-scripps-networks-for-14-point-6b-in-cash-and-stock.html

[jtvalue]

I understand US subs are declining in range of 2-3% and that the SNI acquisition will take them to 5x debt/EBITDA - but come on!  The stock has declined 23% since the deal. I currently have it trading at a pro-forma FCF yield of 16% after the deal closes and they will quickly delever back to 3.5x. Anyone else have thoughts?

[HalfMeasure]

I understand US subs are declining in range of 2-3% and that the SNI acquisition will take them to 5x debt/EBITDA - but come on!  The stock has declined 23% since the deal. I currently have it trading at a pro-forma FCF yield of 16% after the deal closes and they will quickly delever back to 3.5x. Anyone else have thoughts?

 

Free cash flow does not matter in this market. Please provide a better thematic driven story, bonus point for every use of the word disruption.

[KJP]

I understand US subs are declining in range of 2-3% and that the SNI acquisition will take them to 5x debt/EBITDA - but come on!  The stock has declined 23% since the deal. I currently have it trading at a pro-forma FCF yield of 16% after the deal closes and they will quickly delever back to 3.5x. Anyone else have thoughts?

 

Free cash flow does not matter in this market. Please provide a better thematic driven story, bonus point for every use of the word disruption.

 

U.S. terrestrial broadcasters have the same very large spread between FCF yields on their equity and the yields on their debt.  I don't know how other people evaluate these businesses, but my concern is that, given the very high debt levels at these companies, an equityholder who's interested in holding these as a long-term investment must be very comfortable that FCF is going to remain strong for many years.  Given all the changes that are happening in video distribution, do you have confidence in what Discovery's or Nexstar's FCF is going to be in 2029?

 

On the other hand, in its latest debt offering, Discovery was able to issue 30-year notes at a 5.2% yield.  Would you rather own the equity at a mid-teens current FCF yield or a 30-year note with ~5% yield?

 

Also, if the thesis is that you'll be able to sell this for $27/share in 6-12 months just from normal volatility, then what I said above is not really relevant.

[Packer16]

The key here IMO is what is the debt trading for.  For many of these media names the debt is trading in the BBB/BB range & the reason for the spread is the fear of substitution.  Substitution will happen bu the question will the incumbents have enough time to react (ala fixed-line & cellular) or not (newspapers & internet).  I am of the opinion that there is enough time to react to the substitution will be adopted by the incumbents before the disruptors can cause much damage.  This is what the bond market is saying also & I also believe the bond marker before the stock market anyway.

 

Packer

[KJP]

The key here IMO is what is the debt trading for.  For many of these media names the debt is trading in the BBB/BB range & the reason for the spread is the fear of substitution.  Substitution will happen bu the question will the incumbents have enough time to react (ala fixed-line & cellular) or not (newspapers & internet).  I am of the opinion that there is enough time to react to the substitution will be adopted by the incumbents before the disruptors can cause much damage.  This is what the bond market is saying also & I also believe the bond marker before the stock market anyway.

 

Packer

 

What's the maturity on the debt you're looking at?  If the concern is that these businesses might really start to decline 7-15 years from now (which would greatly affect the equity), how much does the yield on 5-year debt tell you?