DISCA - Significantly undervalued?

Discovery Communications (DISCA) is the leader in non-fiction media and owns all of its content and IP. The business has been growing steadily every year; yet the stock has declined for 4 years due to fears of ‘cord cutting’.

Recently, DISCA acquired Scripps Networks and this has increased its content even more.

The business is headed by David Zaslav who is a highly experienced and switched on CEO. Media mogul John Malone owns a sizeable chunk of DISCA and has been buying stock in the open market.

DISCA is trying to transition to the ‘streaming age’ and planning to launch its own streaming bundle.

DISCA only operates in the non-fiction segment where competition is low (all other players such as Netflix, Apple, Amazon etc) are fighting it out in the fiction space; thus their production costs are very high relative to DISCA.

3 billion subscribers in over 200 countries pay for DISCA’s channels and the combined entity now owns Discovery Channel, TLC, Eurosport, Animal Planet, Travel Channel, Cooking Channel, Discovery Kids, OWN etc.

Despite the pessimism surrounding the company, its revenue has continued to increase every single year over the past decade and the business is a cash producing machine!

In terms of valuation, the company is now trading at 12 times year-end earnings (1.87 times book). Wall Street analysts are expecting EPS to compound at 14-15% pa over the next 4-5 years; so the stock is trading at a PEG ratio of around 0.7 which appears to be a steal for such a quality cash throwing global franchise.

IF the analysts’ estimates materialise and DISCA is able to transition to the ‘streaming age’, its stock will probably compound at 20-25% p.a. over the next 4-5 years (stock at $75 within 4-5 years).

Now I am aware, this is not an exciting growth company; but 14-15% pa EPS growth from a cash producing machine isn’t too shabby and as an investor, I am only interested in the potential return on my investment (as opposed to how quickly any company might grow).

In the interest of full disclosure, I recently went long DISCA at $24 and this position represents 5% of my portfolio.

Finally, this is the only media business in my portfolio and the rest of the companies are in the e commerce, SAAS, education, digital payments etc space.

Since I benefit from this board; thought I’d share a potentially attractive investment opportunity(DISCA) with everyone on here.