Sponsored By:

Should I Buy DISCA Stock? 3 Pros, 3 Cons

Did DISCA make the right move wtih Zaslav's six-year extension?

   

Discovery Communications (DISCA) announced Friday that it was extending CEO David Zaslav’s employment agreement for another six years.

Discovery Communications 185 Should I Buy DISCA Stock? 3 Pros, 3 ConsZaslav could earn more than $100 million in 2014 if he achieves various corporate performance objectives. Existing investors likely don’t have a problem with the compensation package, as DISCA stock is up 450% since he took over in January 2007.

In the last two years DISCA stock has achieved annual total returns of 55% and 42% respectively. It now sits less than 3% off its five-year high. But does that mean it’s time to buy DISCA stock, or has DISCA already priced in all the good news?

Here are three pros and cons to jumping on board:

DISCA Stock Pros

Strong third quarter: David Zaslav described DISCA’s third quarter earnings as “strong” in the company’s Q3 press release at the end of October. That’s an understatement, as revenues gained 28% year-over-year, while net income and free cash flow both jumped 24% YOY. Most importantly, DISCA is growing its business organically with double-digit increases on both the top and bottom lines in the U.S. and internationally. Even better, most of its growth in the future will come from sustained organic margin expansion, ensuring earnings per share continue to grow and with it DISCA stock.

OWN: It took a while, but Oprah Winfrey’s network (50%-owned by DISCA) is starting to kick butt. In Q3, OWN increased its prime time viewership by 50% year-over-year, resulting in significantly higher advertising revenue. In Q3 the joint-venture paid down $20 million of what it owed to DISCA, and Zaslav expects that more will be repaid in Q4. Most importantly, it will generate positive equity income for the first time in the network’s almost three-year history.

International networks: Excluding the recent acquisition of three companies including SBS Nordic, DISCA’s international segment grew revenues in its Q3 by 18% (excludes impact of exchange rates) with a 29% increase in advertising year-over-year. Regions doing well include Western Europe and Latin America. Adjusted OIBDA jumped 17% in the third quarter, excluding foreign exchange and acquisitions. That doesn’t sound like much, but when you add back the revenues of the three acquisitions, revenues actually increased by 59% internationally. With adjusted OIBDA margins of 37% — 21% percentage points less than in the U.S. — there’s plenty of room for improvement on the upside.

DISCA Stock Cons

Valuation: DISCA stock is currently trading at 6.2 times sales, 30% higher than its average multiple of 4.8 over the last five years. DISCA is currently rumored to be mulling a bid for Scripps Networks Interactive (SNI), which has an enterprise value that’s 12 times EBITDA — 29% lower than Discovery’s multiple of 17 times EBITDA. While SNI is clearly an attractive target, you have to wonder whether SNI is undervalued or DISCA is overvalued.

Stock Repurchases: Since 2010, DISCAs board has approved up to $4 billion in stock repurchases. So far those have bought back $3.3 billion, including 2.78 million shares of DISCA stock. In the 40 months since undertaking the buybacks, it has repurchased 21% of its outstanding shares. That means if you owned 20% of the company in 2010 and held all your shares you now own 25% without investing an additional penny. Sounds good, until you realize that the company now has $3.3 billion less cash with which to make acquisitions such as buying SNI or simply to reduce its outstanding debt.

Zaslav’s Compensation: Is anyone really worth $100 million per year? John Malone, Chairman of Liberty Media (LMCA) and a member of Discovery’s board believes the answer to the question is an unequivocal yes: “David has done a superb job. He built a strong management team that expanded the company’s reach and relevance, increased its market share domestically and around the world, and created a bigger stronger portfolio of brands.” While Zaslav has indeed done all of that, it’s disappointing to note that he only holds 182,418 shares of DISCA stock, despite earning $22.5 million in cash compensation over the past three years. He definitely should own more shares given the profits generated from exercising his stock options.

DISCA Stock Verdict

Although the three cons listed are all serious arguments against owning DISCA stock, I believe Zaslav is doing a good job operating Discovery’s business. Hanging in there while the OWN investment looked to be heading south took courage and conviction. That commitment is going to be repaid big time during the next 24 months.

So, should you buy DISCA stock? I think so. Just don’t expect another 40% return in 2014.

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


Article printed from InvestorPlace Media, http://investorplace.com/2014/01/buy-disca-stock-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.