Discovery & Scripps: Content Creation at its Finest

I have long considered Discovery Communications (NASDAQ: DISCA  ) and Scripps Networks Interactive (NYSE: SNI  )  to be the reigning brother/sister duo of the informative/nonfiction television segment, respectively. With built-in brand recognition and loyal fan bases, Discovery and Scripps represent two of the strongest growth plays on pure content creation going forward.

Content is king
Bill Gates said it best circa 1996, "Content is king." The famous phrase has perhaps never been more applicable than it is right now with regard to media. As technology continues to advance, the ways in which viewers can consume content are growing rapidly. From set-top boxes and online streaming suites to smart phones and tablets, viewers can watch their favorite movies and television shows from almost anywhere they choose.

Throughout all of these advancements, the only constant has been the demand for compelling content. With nothing in the foreseeable future capable of changing this, content creation must remain the primary aspect by which we as investors judge all media companies.

Naturals at content creation
A good deal of Discovery's content successfully appeals to key age groups among men and much of Scripps' content has been similarly successful among key female age groups. Both companies have excelled at creating powerful brands over the years.

Discovery's signature Discovery Channel network is universally known as 'the nature channel.' Similarly, its popular Animal Planet network is often referred to as 'the animal channel.' The company even has a network suitably called The Military Channel.

This strong recognition among viewers is due to several factors. First, Discovery's management has been able to continually create new and compelling content while still sticking to its bread-and-butter genres. Second, the company's content has very few direct competitors which gives the business something of a moat.

Scripps Networks is very similar in this regard and it is in fact one of the few competitors to Discovery. However, despite some crossover between the two companies' content lineups there are also some key distinctions.

Over the years, management at Scripps has successfully built a stable of lifestyle networks. A majority of the company's channels focus on the increasingly popular how-to style of programming. Scripps' signature networks Food Network, Home and Garden TV, and Travel Channel each feature original television shows that cater specifically to consumers eager to watch and learn new skills and techniques.

Scripps Networks' moat may be a bit better than Discovery's moat. Quite simply, a vast majority of the content that appears on channels like Food Network and Home and Garden TV is material that viewers simply cannot find anywhere else. If viewers want to watch a program about baking recipes, chances are that they will tune in to one of Scripps' food-oriented networks, as almost no other channels have similar content.

Future growth
The major growth drivers for Discovery and Scripps are largely the same. Both companies benefit from the seemingly insatiable demand for original content. Both companies successfully capitalize on popular viewer trends by molding content in their pipelines to exactly what viewers want to see at any given time.

Discovery is the more global company at this point. It is becoming increasingly diverse, as its 2012 acquisition of SBS Nordic Operations illustrates. The deal will help Discovery expand into Europe with 12 new television networks. 

Discovery also took a 20% stake in European media company Eurosport and it has the option to take a controlling interest in two years. This marks the company's first foray into sports programming and illustrates just how large Discovery's appetite is for future growth. 

Scripps has also been busily growing the strength of its brands internationally. Most notably, the company finished its acquisition of Asian Food Network, which is based in Singapore and reaches more than eight million viewers. The move will significantly strengthen Scripps' presence in the area.

Additionally, management at Scripps is actively searching for expansion opportunities for Food Network and Travel Channel in Latin America and Eastern Europe. 

Solid growth
Not surprisingly, great growth stories translate into solid growth for these two companies. The following breakdown shows Discovery and Scripps' projected revenue and earnings growth rates for 2014: 

Company

Discovery

Scripps

Revenue Growth 2014

11.7%

7.5%

EPS Growth 2014

29.1%

12.2%

Although Discovery is expected to lead Scripps in terms of both revenue and EPS growth for fiscal 2014, both companies look set to grow rather well next year.

Scripps makes up for its slower growth by offering more enticing valuation multiples. The company's forward P/E is only 17.8, significantly lower than Discovery's 21.53. Additionally, Scripps pays a dividend of $0.60 which is equal to a yield of 0.80%, while Discovery does not pay a dividend at this time. 

Conclusion
The demand for compelling content shows no signs of stopping any time soon. Discovery Communications and Scripps Networks will likely continue to benefit from this powerful consumer trend. Whether it is through the more aggressive grower that is Discovery or the cheaper dividend payer that is Scripps, long-term investors should consider these plays on pure content creation.

Content is King! And those who own it will control the kingdom
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