Why Discovery Communications stock soared 22% in November

What happened

Shares of Discovery Communication (NASDAQ: DISC.A) (NASDAQ: DISC) gained 22.2% in value last month, according to data provided by S&P Global Market Intelligence.

Discovery posted better-than-expected results in early November, with improvement in the international segment. Additionally, the company is seeing a significant increase in its free cash flow, following the acquisition of Scripps last year. Moreover, the company the debt leverage ratio falls, and management continues to return cash to shareholders.

Image source: Getty Images.

So what

Over the past five years, Discovery’s stock has been flat. This probably has more to do with investor perception than anything else, as Discovery has seen its revenue and free cash flow gradually increase. Investors weren’t sure how the company would continue to grow in a new digital landscape, but that uncertainty may be starting to fade.

The last quarter may have marked the beginning of a significant shift in investor expectations. Revenue and adjusted operating profit increased by 5% and 9% respectively. In the first three quarters of 2019, revenue and adjusted operating income were up 9% and 22%, respectively. These are big numbers for a stock that trades for a forward price/earnings (P/E) ratio of only 7.9x earnings estimates for next year.

Free cash flow was down 3% year-over-year in the quarter, but over the past year free cash flow jumped 45% to $2.866 billion, with the addition of Scripps. Management uses cash to pay down debt and buy back stock at low prices.

Now what

Management offered a positive outlook for the remainder of the year. US advertising growth is expected to be in the low single digit range, which management believes could be conservative. There were some low ratings for some of Discovery’s networks in the third quarter, but the company doubled the amount of premium content on the Food Network to boost viewership over the holidays.

Discovery has a plan to build the digital side of its content delivery, including localizing streaming products for different countries. Management expects mid-single-digit growth in international advertising for the fourth quarter. They expect to gain market share in key markets and generate returns from their digital investments.

Analysts expect the company to report total revenue of $11.14 billion for 2019, up 5.6% year-over-year. Earnings are expected to be $3.64 per share in 2019 and increase to $3.84 in 2020.

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