I finally got something right. Discovery Communications (DISCA) reported another positive surprise (EBITDA +23%, margins +700 basis points) and provided upbeat 2009 guidance. The stock responded by jumping 15%, leaving it within 10% of its mid-September, pre-crash level.
4Q08 benefited from continued strength in domestic and international advertising, ongoing growth in domestic and international distribution fees, and great cost control. Guidance for 2009 suggests these trends will continue with the macroeconomic headwinds taking growth rates to flat to up low single digits excluding investment in the start-up Oprah Winfrey Network. In this environment, especially for media stocks, the guidance is stellar.
DISCA management is doing a great job of managing the business and managing street expectations. If the company can hold on through the downturn it is poised to come out the other side in really good shape. A nice aspect to the DISCA story is that right now results are being driven on a global basis by the well established networks (Discovery, TLC, and Animal Planet) but the potential for phase 2 and phase 3 exists as new sets of networks are rebranded and monetized. DISCA is already having success with Science Channel and Investigation Discovery. Down the road similar value could be created from the Oprah Winfrey Network or currently morose nets like FitTV, Discovery Kids, and Military Channel.
DISCA’s results also bode well for other cable network heavy stocks including Time Warner (TWX), Viacom (VIA), and Scripps Interactive (SNI). DISCA is the best story but the cushion of distribution fee growth and relatively strong advertising spending makes cable networks one of the only investable themes in media.