Discovery Stock Analysis


Discovery Stock Analysis

Business Description:

  • 800 million monthly unique viewers globally

  • 250 million hours viewed daily

  • Operates under 2 segments: US Networks and International Networks, each divided into advertising and distribution subsegments

  • 65% of revenues in 2020 came from US Networks, 38% Advertising and 27% Distribution

  • 35% of revenues in 2020 came from International Networks, 15% Advertising and 19% Distribution

  • Since shows are factual, expenses are limited compared to competitors with 2020 operating margins of 25% vs 18% for Viacom and Netflix and 2% for Disney (20% in 2019)

  • Stock crashed by 60% after a margin call from Archegos Capital


Catalysts:

  • Recovery from pandemic

  • Content creation/acquisition is less expensive compared to competitors

  • Olympics in 2021 could bring $175 million to $200 million in operating income before depreciation and amortization

  • Discovery+ ARPU expected to 3-4X US Networks Linear

  • Possible share buybacks


Risks:

  • Streaming business is very competitive with Netflix, Disney+, Amazon Prime, Apple TV+ and others

  • Streaming business might be a cash flow drain in initial years

  • Cable Networks businesses are in decline

  • Concentrated business


Financial Analysis:

  • Revenues of $10.7 Billion in FY20 down from $11.1 Billion in FY19

  • Operating income of $2.73 Billion in FY20 vs $3.19 Billion in FY19

  • Net income of $1.21 Billion in FY20 down from $2.06 billion in FY19

  • Free Cash flow of $2.33 Billion in FY20 vs $3.11 million for FY19

  • Net income in 2017 and 2018 were unusually lower from impairment of goodwill

Discovery Stock Analysis
  • Balance Sheet

  • Total assets: $34.0 Billion ; total liabilities: $22.0 Billion; book value: $10.4 Billion

  • Cash: $2.09 Billion, debts: $15.4 Billion, current assets: $6.13 Billion, current liabilities: $3.08 Billion


Valuations:

  • My personal Biases:

  • Transition to streaming more challenging that company anticipates because of concentration of programming, making customer acquisition slow

  • Assumptions for base case:

  • Revenues in 2021 will return to 2019 level with extra revenues from Olympics and Streaming

  • US Network Revenues will grow by 12% annually from 2021-2025 (17% in the last five years) with operating margins of 35% (average of 45% in last five years)

  • International Network Revenues will grow by 4% annually from 2021-2025 (4% in the last five years) with operating margins of 10% (average of 12% in last five years)

  • 80% of operating income conversion in FCF

Discovery Stock Analysis
  • Use P/FCF as exit multiples for 2025 (range of 5-33 in last 5 years)

  • Bull case 15% more than in base case and bear case 15% less

  • Shares outstanding doesn’t change

Discovery Stock Analysis

Conclusion

  • Undervalued with a market cap of $17 Billion for $23 Billion in intrinsic value in a conservative analysis

  • With a margin of safety, a fair value would be $20 billion

  • Exit multiples analysis shows an expected returns of 25% per year with limited downside of 20% and possible reward of over 400% in bull case.

Read the full analysis here: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/31950949

Discovery Stock Analysis

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