Most people probably associate the Discovery Channel with its most popular show: Shark Week. The latest installment of this franchise, Phelps vs. Shark, which pitted the decorated olympian in a race against a great white shark, fell dead flat. You might say Shark Week jumped the shark. But this is just the beginning of the problems facing the company. Last week, Discovery announced earnings and the stock was pummeled. The WSJ reports:
The media company lost 5% of its U.S. channel subscribers in the third quarter, an increase from the second quarter and up from 2% in the period a year ago. The subscriber losses have been concentrated among Discovery’s smaller channels, while its flagship channels like Discovery channel, TLC and Animal Planet have held relatively steady. As a result, despite the subscriber decline, Discovery was able to increase its domestic distribution revenue in the third quarter by a healthy 6% and reaffirm its guidance for the year of “mid-single digit growth” in distribution revenue. But the company’s results revealed just how fast cord-cutting and cord-shaving are reshaping the television ecosystems, particularly for media companies that lack sports within the U.S. market. Discovery shares were down 7.5% in midday trading.
It wasn’t just weak on the day of the earnings announcement. This stock is now down 50% over the last six months. Clearly, investors have become very worried. This horrible performance of the share price, though, has resulted in a wonderful valuation for the stock. It is now trading at or near its cheapest levels in at least a decade.
It is also cheap relative to its peers, now sporting an operating earnings yield over 20%.
Insiders clearly think the current price is a bargain. The new CFO just bought about $1 million worth, probably equivalent to his annual salary.
And we are starting to see some early signs of exhaustion for the current downtrend including a daily DeMark Sequential buy signal and a bullish divergence in money flow.
All in all, it looks like the concerns regarding the risk of increased cord cutting on the part of consumers are probably fully priced in at this point, if not completely overblown. Discovery is in the process of buying rival Scripps Networks, operator of the Food Network, HGTV and the Travel Channel. This deal, put together by media mogul and Discovery shareholder John Malone, could potentially boost the company’s bargaining power with new television providers. It’s also possible that increased merger interest in the media space could make Discovery a takeover target for one of the larger players. Either way, this stock looks like a good risk/reward at current prices so I’m putting on a starter position and adding it to the long side of our list of trade ideas.
UPDATE:
‘I'm gonna bet that Discovery will be able to transition to direct consumer platforms in a reasonably efficient way. And if they successfully do that, then [the stock is] dirt cheap right now.’ https://t.co/je03kwDgGp
— Jesse Felder (@jessefelder) November 18, 2017