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Discovery Communications Inc. Earnings: 3 Things to Watch on Thursday

By Demitri Kalogeropoulos - Feb 15, 2016 at 1:00PM

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Can the world's No. 1 pay-TV operator buck the downtrend that has sent media stocks tumbling this year?

It's been a brutal few months for stocks that depend on growth in the TV broadcasting industry. Media giants Disney (DIS -0.07%) and Time Warner (TWX) sold off last week -- despite posting record overall quarterly results -- as investors worried about how the shift away from traditional pay-TV viewing might hurt their businesses.

In that context, shareholders will be looking for evidence of that negative trend when Discovery Communications (DISCK), the world's No. 1 pay-TV programmer, posts quarterly results on Feb. 18.

Here are a few key metrics to watch for in the announcement.

Advertising sales growth
Ad sales account for the majority of Discovery revenue, which is why it was such good news for the business that they rebounded sharply in the third quarter, jumping to a 6% growth pace from 2% over the previous six months.

Of course, it's possible that the bounce was short-lived and that Discovery will be held back this quarter by the same market forces that pushed rivals' results lower recently. Disney's media division, for one, revealed slowing sales growth and a 6% decline in fourth quarter profits last week, which it blamed on lower ratings and a slight dip in subscribers. The same trend pinched rival Time Warner, whose Turner network saw sales growth slow to 2% in 2015 from 4% the prior year and 5% in 2013.

Source: Discovery

Discovery's management has said that its broadcasting business is stronger than those of competitors, thanks to its deep portfolio of company-owned brands that resonate strongly with global audiences. Investors will be looking for solid ad growth momentum to confirm that management's confidence is well placed.

International business profits
Foreign currency swings are wreaking havoc on Discovery's reported international results, but back those out and you'll see a business with strong operating trends. Sales rose 9% in the third quarter as advertising jumped 12% and distribution fees rose 8%. Discovery saw particular strength in its Latin America and Southern European markets.

Yet profitability is far lower in this segment than in the U.S. business (29% margin vs. 57% margin last quarter). That gap has a lot to do with currency devaluations against the U.S. dollar, but it's also being powered by huge investments that Discovery has been making into areas like its Eurosport programming. CEO David Zaslav believes this spending will start paying off in the current quarter, when Eurosport's margin should climb into the double digits from 6% last quarter. Discovery also sees the network doubling its advertising revenue over the next five years.

Cash returns to shareholders
Chief Financial Officer Andrew Warren announced in a conference call last quarter that Discovery was making a big change to its capital allocation policy by allowing its debt leverage ratio to climb higher. The decision won't impact the company's debt ratings -- executives have more confidence in the business' financial strength and outlook.

As a result, cash that would have gone toward paying down debt was likely directed toward stock buybacks this quarter. In the third quarter conference call, executives noted that, in their estimation, shares represented an extremely attractive return at current prices. Discovery's stock has dropped by a further 20% since that time, which suggests management likely significantly ramped up their repurchase spending while allowing debt leverage to tick higher.

Demitrios Kalogeropoulos owns shares of Walt Disney. The Motley Fool owns shares of and recommends Discovery Communications and Walt Disney. The Motley Fool recommends Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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