In the shade of those wrestling giants, midsize leaders like Discovery (DISCA) are also moving to seize a portion of the evolving space. Those efforts include expanding into YouTube TV, launching a rebranded DIY Network and leveraging market expansion opportunities in Europe and Asia.
Investors will get a clearer look at Discovery’s efforts when it reports first-quarter results on May 2.
Ahead of that report, the stock is forming the right side of a choppy cup base.
Scripps Brings A Streaming TV Boost
Discovery received a boost last year from its $14.6 billion acquisition of Scripps Networks Interactive. That added HGTV, Travel Channel, Food Network and others to Discovery’s lineup. That past year has been spent integrating the operations, and finding ways to spin the combined content out to broader markets.
YouTube TV, a unit of Alphabet‘s (GOOGL) Google, announced April 10 it would add Discovery channels including HGTV, Food Network, TLC, Investigation Discovery, Animal Planet, Travel Channel, MotorTrend and EPIX. The deal led YouTube TV to hoist its subscription fee to $49.99 per month. It previously raised rates to $40 last year in March. Plans call for adding Oprah Winfrey’s OWN network later this year.
JPMorgan estimates the YouTube streaming TV service had around 1.8 million subscribers at the end of the first quarter, and projects an increase to 2.6 million by year-end. The report forecast that the YouTube deal would exert upward pressure on Discovery’s distribution fees.
The New DIY Network
Discovery is also in the process of rebranding its DIY network and rebuilding a new network around Chip and Joanna Gaines, stars of HGTV’s “Fixer Upper” show. The couple will serve as the channel’s chief creative officers, overseeing the new program lineup. The network is set to launch in mid-2020.
“Fixer Upper” had drawn an average 3 million visitors per episode in its final two seasons. Discovery DIY Network programs reported average viewership at 200,000, according the JPMorgan.
At the end of 2018, the DIY network reached 54 million subscribers. Discovery’s HGTV channel reached 89 million.
At the time of the acquisition, Scripps content had very little overseas exposure. Discovery, on the other hand, saw about 48% of its 2017 revenue from its international networks. That gave Discovery an opportunity to offer many of the channels and shows for the first time in international markets.
Discovery and BBC announced early in April a 10-year deal to create a streaming TV service that the company described as the “Netflix of nature.” It expects to launch before the end of the year. Discovery also owns and operates streaming service Eurosports Player. It owns the European rights to the next three Olympics, as well as tennis and bicycling franchises.
Following its strategy of building fan relationships based on their pursuits, Discovery launched Golf TV in Asia early this year.
Technical Indicators Lagging
What does it all add up to? Discovery’s annual earnings have toggled back and forth for the past four years, but upshifted to a 48% gain in 2018. Low-single-digit revenue growth popped 54%, boosted by the Scripps deal.
For the first quarter, analyst consensus targets a 49% earnings gain and a 17% revenue increase. Over the past four quarters, Discovery has averaged a 46% earnings increase and a 54% revenue rise. Discovery has lagged analysts’ earnings forecasts in all four recent quarters, missing by margins ranging from 8% to 62%.
Discovery’s current base has a buy point at 34.99.
Some of Discovery’s technical signals are not flashing strength. Its Relative Strength Rating is a weak 78. That means the stock is underperforming 22% of the stocks in IBD’s database. Its RS line has rebounded from March lows, but still lags early-2019 highs, and is deep in a six-month consolidation. You would prefer to see that line rising at least above recent highs before the stock moves to make a breakout.
Follow Alan R. Elliott on Twitter @IBD_Aelliott.
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