Bet Against Oprah? Not on Your Life

by Will Ashworth | November 6, 2012 2:17 pm

Shares of media company Discovery Communications (NASDAQ:DISCA[1]) were losing ground Tuesday after painting a gloomy full-year picture, but stay calm, shareholders …

… Oprah’s coming to the rescue.

DISCA reported lower third-quarter earnings this morning, and unfortunately, given the way the latest earnings season has run its course, any sign of weakness results in a downward revision in guidance, too. Discovery was no different, cutting its 2012 revenue outlook from a low end of $4.55 billion to $4.48 billion.

Still, good companies find ways to win, and in the coming quarters, the much maligned talk show host will help keep Discovery stock moving ever higher.

But let’s get the Q3 earnings report out of the way before delving into the reasons why Discovery is still attractive.

The Street views the combination of lower guidance with both earnings and revenue misses as a negative, and as I write, the stock is down almost 3.5% on the day. That’s to be expected.

Still, David Zaslav, CEO, feels it had a good quarter:

“Discovery delivered another quarter of strong operating results … In the U.S. we expanded market share, built new hits and capitalized on the ongoing strength of the ad market, while internationally, we further leveraged the universal appeal of our programming …”

I’m seeing what Zaslav sees. If you’re a Discovery shareholder, the future is bright and getting brighter thanks to none other than Oprah Winfrey.

I know what you’re thinking. How can such a small piece of the Discovery pie move the needle?

It’s called perception.

As the Oprah Winfrey Network (OWN) slowly gets stronger, it provides greater attention for the entire Discovery family. I’m confident there are many women (target demographic) in America who know Oprah but are less familiar with the Discovery Channel, TLC or even Animal Planet. She’s a magnet for eyeballs.

Most importantly, OWN’s numbers keep improving. According to the network, its October ratings grew for the ninth consecutive month year-over-year, with the total number of female viewers jumping 44% over October 2011. Year-to-date, its viewership is up 41% versus a year ago. Clearly, Oprah’s Next Chapter has helped stabilize the network.

Non-Oprah shows also appear to be getting good ratings, and the addition of Comcast (NASDAQ:CMCSA[2]) in April has already added 3 million subscribers. Come January, Comcast and other cable broadcasters and satellite operators will begin paying OWN for the right to broadcast its shows, which will severely alter the network’s financial picture for the better.

In an Oct. 19 article in the Hollywood Reporter, author Marisa Guthrie quotes SNL Kagan analyst Derek Baine’s March report that projects Oprah’s network will lose $143 million in 2012[3]; Discovery might even have to write down its investment. However, CFO Andy Warren suggested in September that it will break-even by the second half of 2013.

Under the terms of its partnership agreement with Harpo Productions (Oprah’s production company), a portion of the debt funded by Discovery to OWN, which sits at approximately $432 million at the end of the third quarter, is to be repaid before Harpo receives an equal share of any distributions by the network. In the meantime, interest accrues at 7.5%, which isn’t half bad. But even if Kagan’s report is accurate — which doesn’t appear to be the case — the network is picking up momentum at just the right time despite all the setbacks during the past 23 months.

Bottom Line

Successful investing involves being able to see the forest through the trees. Discovery Communications has achieved a 19.3% annual total return over the past five years and currently is within shouting distance of a five-year high. It trades around 21 times earnings, suggesting its stock is fairly valued.

However, portfolio manager James Landreth of North Capital LLC believes investors aren’t factoring into the valuation the repricing of its content that’s coming over the next five years, which will boost its revenues and earnings by a significant amount. Forgetting this powerful argument for a second, the specter of OWN rising from the ashes should also light a major fire under its stock in the next 12 to 24 months.

Bet against Oprah Winfrey? Not on your life.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. DISCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=DISCA
  2. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  3. Oprah’s network will lose $143 million in 2012: http://www.hollywoodreporter.com/news/oprah-winfrey-network-own-iyanla-vanzant-377725

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