Discovery Stock Hits 52-Week High as Earnings Miss, Analysts Cheer U.S. Ad Growth

David Zaslav 1 - 2017 Ignition Future of Media - Getty - H 2018
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The TV networks powerhouse, led by CEO David Zaslav, acquired Scripps Networks Interactive earlier this year, which continues to affect the financials, including expenses, of the combined company.

Discovery, led by CEO David Zaslav, on Thursday reported lower third-quarter earnings that missed Wall Street consensus estimates amid higher charges related to the acquisition of Scripps Networks Interactive, but U.S. advertising growth and other financials exceeded expectations, helping drive the stock to a new 52-week high.

In early trading, Discovery shares hit a high of $34.89. As of 9:45 a.m. ET, they were up 3.9 percent at $34.38.

The company posted earnings of $117 million, or 16 cents per share, compared with $218 million, or 38 cents per share, in the year-ago period. Adjusted earnings reached 52 cents per share, coming in below Wall Street expectations.

Discovery, whose networks include the Discovery Channel, Animal Planet, TLC and OWN, earlier this year closed its acquisition of Scripps, owner of the likes of HGTV, Travel Channel and Food Network, to create a powerhouse in the unscripted and lifestyle content field amid continuing industry consolidation. "Improved operating results were more than offset by higher restructuring and other charges associated with the integration of Scripps Networks, higher tax expenses and higher interest expense," the company said about its latest quarterly performance.

But adjusted operating income before depreciation and amortization (OIBDA), another key profitability metric, rose 18 percent when excluding the impact of foreign currency fluctuations. One analyst after the earnings report lauded that gain as better than expected. "U.S. and international synergies [with Scripps] drive adjusted OIBDA outperformance," explained MKM Partners' Eric Handler, with Zaslav on an earnings call later also noting that the Scripps acquisition "has exceeded our expectations on every front."

The company's third-quarter revenue, excluding the impact of foreign currency fluctuations, increased 2 percent, exceeding Wall Street projections, as the U.S. business grew 4 percent and international networks grew 2 percent. In another positive, U.S. networks advertising revenue increased 5 percent, distribution revenue remained unchanged and "other" revenue rose 18 percent. 

Overall, "Discovery third-quarter [earnings] offered evidence for both bulls and bears," said Sanford C. Bernstein analyst Todd Juenger, who was one of several Wall Street observers to mention the U.S. ad gain as "the positive highlight" of the quarter.

Zaslav on Thursday's earnings call lauded Discovery’s domestic networks for "outperforming the marketplace" in the ratings, with the firm's core networks up 1 percent in the live-plus-3 ratings, saying they were "currently bucking some of the trends we are seeing across the industry." He added: "Our ratings momentum has been an outlier in an industry where both cable and broadcast performance has been increasingly soft."

Zaslav also signaled little interest in bidding for the Fox regional sports networks that the Walt Disney Co. must sell as part of its acquisition of large parts of 21st Century Fox. "We like outside of U.S., but we think we are late here," the Discovery CEO said about the U.S. sports assets. "Those businesses can be dicey." He concluded: "Unless it was a great deal, you wouldn’t see us in there.”

In September, Discovery struck licensing deals with Dish's Sling TV and Hulu that ensured carriage on those skinny bundles, whose appetite for the company's programming analysts had at times wondered about. "The economics on those deals are favorable for us," Zaslav has said of the deals.

"Discovery is as well positioned across the OTT ecosystem as any programmer or media company," he said on Thursday's earnings call. But he also suggested skinny bundles in the U.S. would have to change over time to see accelerating consumer take-up. "Some of these packages still are carrying too much stuff. And so they are actually losing money when they sell the package for $40 or $45 or $35. And it's because these packages are still forced to carry some stuff that they don’t want to. ... You are going to see some of the channels that are carried on these bundles taken off. ... They are not necessary from a consumer perspective."

Zaslav also once again highlighted the strong female audience reach of Discovery after the Scripps takeover. "If you are an advertiser buying the NFL to reach women, you could reach the same number by buying one spot, a roadblock, across our top women’s networks, HGTV, Food, TLC, ID and OWN," he said. "I believe we can intercept some of those huge-CPM [cost per thousand ad impressions] NFL or broadcast dollars, which would be big win for advertisers, because it would be at a much lower CPM, a big increase for us and big reach." Concluded the CEO: "It’s one of the wow reveals of Discovery and Scripps coming together."