Media Entertainment Stocks

Discovery Communications 2014 Annual Valuation $DISCA

200px-Discovery_Communications.svgBenjamin 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 Lowest PEmg Companies for Enterprising Investors.  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 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 nonfiction media and entertainment company that provide programming across multiple distribution platforms worldwide. Discovery operates in three segments: U.S. Networks, International Networks and Education and Other. The Company’s U.S. Networks, consists principally of domestic cable and satellite television networks, Websites and other digital media services. Its International Networks consists primarily of international cable and satellite television networks and Websites. It’s Education and other consists principally of curriculum-based education product and service offerings and postproduction audio services. In November 2013, the Company announced it has acquired Espresso Group Limited, provider of primary school digital education content in the United Kingdom. Effective March 3, 2014, Discovery Communications Inc acquired Raw TV Ltd.

DISCA Chart

DISCA data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. 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 – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. 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 = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $78.20
MG Value $112.88
MG Opinion Undervalued
Value Based on 3% Growth $42.51
Value Based on 0% Growth $24.92
Market Implied Growth Rate 9.09%
Net Current Asset Value (NCAV) -$27.64
PEmg 26.67
Current Ratio 2.19
PB Ratio 2.93

Balance Sheet – 3/31/2014

Current Assets $2,740,000,000
Current Liabilities $1,253,000,000
Total Debt $6,900,000,000
Total Assets $15,311,000,000
Intangible Assets $10,788,000,000
Total Liabilities $9,131,000,000
Outstanding Shares 231,200,000

Earnings Per Share

2014 (estimate) $3.50
2013 $2.97
2012 $2.51
2011 $2.80
2010 $1.47
2009 $1.30
2008 $0.85
2007 -$0.24
2006 -$0.16
2005 $0.12
2004 $0.24

Earnings Per Share – ModernGraham

2014 (estimate) $2.93
2013 $2.50
2012 $2.11
2011 $1.68
2010 $0.96
2009 $0.60

Conclusion:

Discovery Communications does not qualify for either the Defensive Investor or the Enterprising Investor.  The only Defensive Investor requirements the company satisfies are the market capitalization size and the current ratio.  Meanwhile, the Enterprising Investor has concerns with the high level of debt relative to the current assets and the lack of dividend payments.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Viacom (VIAB) and ModernGraham’s valuation of CBS Corporation (CBS).  From a valuation perspective, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.96 in 2010 to an estimated $2.93 for 2014.  This strong level of demonstrated growth outpaces the market’s implied estimate of 9.09% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well above the market 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 Discovery Communications (DISCA) or any other 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; this article is not affiliated with the company in any manner.

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