Why Discovery Communications Stock Climbed 22% in November

12/5/19

By John Ballard, MotleyFool

What happened

Shares of Discovery Communications (NASDAQ:DISCA) (NASDAQ:DISCK) gained 22.2% in value last month, according to data provided by S&P Global Market Intelligence.

Discovery delivered better-than-expected earnings results in early November, with improvement in the international segment. Moreover, the company is seeing a significant boost in its free cash flow, following the Scripps acquisition last year. Plus, the company's debt leverage ratio is coming down, and management continues to return cash to shareholders.

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So what

For the last five years, Discovery stock has been flattish. This likely has more to do with investor perception than anything else, as Discovery has seen its revenue and free cash flow gradually increase. Investors have been unclear how the company would continue to grow in a new digital landscape, but that uncertainty may be starting to fade away.

The latest quarter may have been the beginning of a significant shift in investor expectations. Revenue and adjusted operating income increased by 5% and 9%, respectively. Through the first three quarters of 2019, revenue and adjusted operating income are up 9% and 22%, respectively. Those are big numbers for a stock that trades for a forward price-to-earnings (P/E) ratio of just 7.9 times next year's earnings estimates.

Free cash flow decreased by 3% year over year in the quarter, but over the last year, free cash flow has jumped 45%, to $2.866 billion, with the addition of Scripps. Management is using the cash to pay down debt and repurchase shares at cheap prices.

Now what

Management offered a positive outlook for the remainder of the year. U.S. advertising growth is expected to be in the low-single-digit range, which management believes could prove to be conservative. There were some weak ratings for some of Discovery's networks in the third quarter, but the company has doubled down on the amount of premier content on the Food Network to drive improved viewership through the holidays.

Discovery has a plan to build the digital side of its content delivery, including localizing streaming products for different countries. Management is calling for mid-single-digit growth in international advertising for the fourth quarter. They expect to gain market share in key markets and generate a return from their digital investments.

Analysts expect the company to report $11.14 billion in total revenue for 2019, up 5.6% year over year. Earnings are expected to be $3.64 per share in 2019 and improve to $3.84 in 2020. 

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