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
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
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
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
