Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – May 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Discovery Communications (DISCA) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Discovery Communications, Inc. (Discovery) is a global media and entertainment company that provide programming across multiple distribution platforms around the world. The Company also has a diversified portfolio of Websites and other digital media services, develops and sells curriculum-based education products and services, and provides postproduction audio services. The Company operates through segments such as U.S. Networks and International Networks. The Company’s U.S. Networks, consists principally of domestic television networks and websites. Its International Networks consists principally of international television networks and websites. Discovery Holding Company (DHC) and Discovery Communications, LLC are the wholly-owned subsidiaries of the Company.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$22.42|
|Value Based on 0% Growth||$13.14|
|Market Implied Growth Rate||6.73%|
|Net Current Asset Value (NCAV)||-$12.03|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
Discovery Communications does not pay a dividend.
As this stock analysis shows, Discovery Communications is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability over the last ten years, the lack of dividends and the high PEmg and PB ratios. The Enterprising Investor is concerned with the level of debt relative to the current assets and the lack of of dividends. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be undervalued after seeing its EPSmg (normalized earnings) grow from $0.85 in 2011 to an estimated $1.55 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.73% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Discovery Communications (DISCA)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.