Macquarie Downgrades Discovery Communications; Sees Domestic Footprint 'Softening'

• Discovery Communications Inc. (NASDAQ: DISCA) shares are down 16 percent after hitting a high of $34.80 on July 16.
• Macquarie’s Amy Yong downgraded the rating on the company to Neutral, while reducing the price target from $35 to $29.
• The impact of a softening domestic franchise may not be offset by the company’s initiatives to expand internationally, Yong mentioned.

Analyst Amy Yong said that scaling up Discovery Communications’ international business may be insufficient to offset the impact of a weakening domestic franchise. She expressed concern that the company’s margins and capital returns may come under pressure due to the management’s endeavors to scale operations and the emerging sports franchise.

After attending the company’s Analyst Day, Macquarie has revised its estimates to a top-line 3-year CAGR of 5 percent, versus consensus expectation of 4.6 percent. Discovery Communications is expected to generate 53 percent of its 2017 revenues from its international operations and 47 percent from domestic.

“We’re modelling International revenue and OIBDA 3 yr CAGRs of 4.8% and -1%, respectively, driven by its largest International franchises: sports and Kids. Sports content (~15-20% of revenue) and a Eurosport platform (~135m homes) are raising its Pan-European relevancy,” Yong wrote.

On the domestic front, the company is expected to generate revenue and OIBDA 3-year CAGRs of 5 percent. Yong expects affiliate growth to be about 14 percent in 3Q, as compared to the guidance of low double-digits. The beat is likely to be driven by additional monetization opportunities.

“Since ’13, buybacks provided a 2-3pp lift to EPS and FCF growth. Our ’16/’17 buybacks go meaningfully lower to US$1.1b,” the analyst stated.