Discovery Communications: Weighing The Scripps Acquisition

4/26/18

By Nima Karamlou, SeekingAlpha

Following on our thematic coverage of the US Media space, we are issuing an outperform rating on Discovery Class-A shares given valuation and upside risks with Scripps integration.

Attached below is our research report on Discovery. If you would like to see more detail, please PM me for the model.

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Discovery Communications, Inc. (NASDAQ:DISCA) 1 W EIGHING THE S CRIPPS A CQUISITION INVESTMENT RESEARCH TEAM BlackVault Investments, LP Outperform – PT: $30.87 t Nima Karamlou, Equity Research We believe Discovery (NYSE: DISCA) is a neglected media story whose valuation offers investors an attractive opportunity to nimakaramlou@blackvaultinvestments.com +1 (503) 887-0285 gain exposure to the upsides in the Scripps acquisition and the growing international TV market. Key Points: DISCA-SNI is accretive to terminal value Outperform Discovery’s strategic move to acquire Scripps Networks is a Discovery Communications, Inc. game changer for the group as it helps to address key terminal (NASDAQ: DISCA) value issues weighing on the company. We think the deal adds a profitable and overlapping content portfolio that rounds out Discovery’s core position in unscripted, non-fiction content. Media & Entertainment Price Target $30.87 We feel that the Scripps deal will help Discovery solve its Share Price as of Latest Close $23.94 underperformance in monetizing their content. Implied Upside 33.3% Mkt. Cap, curr. $12,001 International is a MSD growth market 52-Week Range $15.99-$29.71 We think investors have overlooked the growth runway in Discovery’s international business. Discovery earns 49% of its CY Ending 2016A 2017A 2018E 2019E revenue from international networks vs. US Media peer group Revenue($) 6,497 6,873 9,872 10,991 average of 26%. We believe that ex-Scripps, Discovery can grow its international business at a 4.1% CAGR through CY2021. Also, OIBDA($) 2,413 2,531 4,016 4,560 there lies a critical strategic opportunity to expand the EPS($) 1.94 (0.59) 2.70 2.96 International growth runway by exploiting Scripps’ content (88% Street EPS($)* 1.94 (0.59) 2.33 2.89 of revenues are US/Canada driven) through Discovery’s established international channels. model. otherwise stated, all metrics are based on BlackVault Investment Research Revenue and OIBDA figures are in millions. Value at a Reasonable Price amortization.re adjusted and do not include one-time items and depreciation and (*) = Street EPS based on FactSet At current levels, Discovery’s NTM EV/OIBDA multiple is 6.2x, which is ~1.0x below its long-run average of 7.3x. We argue that this valuation offers a good margin of safety as it assumes a long- run terminal growth rate of (3.6%); something we view as unlikely. We believe the Scripps deal will position Discovery to revert to industry average growth. As such, we believe Discovery’s terminal value is worth 7.2x CY2018 OIBDA.
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Disclosure: I am/we are long DISCA.

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