Turns out, it's not just Americans who love sharks, black holes, and true-crime whodunits. Discovery Communications -- parent of a constellation of cable networks, including Discovery Channel, TLC, Animal Planet, and Investigation Discovery -- has become a huge international success.
With programming in 38 languages, Discovery's non-U.S. advertising revenue increased 25% in the second quarter, while affiliate revenues -- payments made to Discovery's networks by cable- and satellite-TV providers -- rose 18%. Combined with the runaway success of Investigation Discovery -- a true-crime network whose ratings have doubled since early 2010 -- the international business has helped boost profits. For the year, analysts expect earnings to jump 32%.
But investors don't seem interested in Discovery's growth story. The stock is down 3% for the year, mainly because of fears that a double-dip recession will take a bite out of cable ad revenues. Between the stock decline and the earnings growth, Discover's P/E ratio has declined from 29 to 20 over the past year.
Here are four reasons you should consider this a buying opportunity. One: Discovery was quite resilient during the last recession, growing ad revenue 6% in 2008 and 4% in 2009, according to Citigroup analyst Jason Bazinet. By contrast, ad revenue at Viacom -- home of Comedy Central and Nickelodeon -- rose 1% in 2008 and fell 7% in 2009.
Two: Domestically it's been eight years since Discovery's last contract renewals with cable and satellite companies, explaining why domestic affiliate revenue has been relatively flat despite significant ratings growth. Once renewals begin in December 2012, Discovery will be in line for "significant step-ups in pricing," contends Deutsche Bank analyst Doug Mitchelson.
Three: Discovery has been aggressively buying back stock, and its board has authorized another $1.4 billion in repurchases. According to Bazinet, each $1 billion in buybacks increases EPS by about 16¢ a share -- a significant amount for a company expected to earn $2.35 a share in 2011.
Four: At some point television networks and movie studios are going to break free of middlemen like iTunes and Netflix. "We've seen a lot of growth in companies whose sole job it is to redistribute someone else's content," says Jerry Jordan, who owns Discovery in his Jordan Opportunity Fund. With technology making it easier for consumers to bring HD programming from the web to their living rooms, says Jordan, there's going to be a "huge opportunity" for companies like Discovery to further monetize their own content.
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