Summary
- Discovery is a very slow growth company, but it makes a lot of free cash flow: close to $2.9 billion on a TTM.
- Can Discovery continue to operate as a stand alone cable provider?
- I believe that at less than 6x FCF to market cap, more can go right than can go wrong.
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- Note: An edited version of this article was first published for my marketplace.
***This article is focused on DISCK, non-voting shares.
Investment Thesis
Discovery's (DISCK) content is cheap to produce, and they own all its IP. This is a strong position to be in, when Netflix (NFLX), Disney (DIS), Amazon (AMZN) Prime, and Apple (AAPL) TV, are all fighting out to solidify their position and have staying power over the next five to ten years.
What Discovery has not got, is that it has not got the distribution sorted out. Also, it does not have direct contact with the consumer. It is essentially being added-on via someone else's distribution platform. And that's the problem surmised right here.
Discovery is very profitable, making strong free cash flow and cheaply valued, but the multiple investors will pay for the stock is not likely to expand up significantly, as investors are likely to remain uncertain of its long-term prospects for a considerable amount of time.
So What's Compelling About Discovery?
Discovery's opportunity is that on the one hand, you have scripted streaming giants, those that create original programming and movies which fight for talent (both on the writing and acting side), which is increasingly expensive and raising every year.
On the other hand, Discovery produces content that strongly resonates with women, reaching almost 35% of women on Sunday nights in America, and its content is extremely cheap to produce. This is lifestyle programming, personality programming, cooking, sports, etc.
The problem that Discovery has is that it has not got a strong direct-to-consumer platform. Presently, it relies on linear TV, which as you know, is having to face plenty of ''cord-cutting''.
Discovery had made an acquisition of Scripps, which credit must be given, it succeeded in integrating. At the time of the acquisition, Discovery stated that it would merge with Scripps which was then generating $700 million of free cash flow, together with Discovery's $1.4 billion and that with restructuring it would reach a target of $3 billion by year-end 2019.
Well, when all was said and done, they reached $2.9 billion on a trailing twelve months, a full 90 days ahead of schedule.
Strong financial discipline translated itself into Discovery aggressively paying down debt, so that its debt presently hovers around 3.1x to OIBDA (this is very similar to EBITDA), and this is at a very satisfactory and safe level for this enterprise.
In essence, you have an asset, which appears to be stable even though the whole industry is facing disruption.
