In terms of making it an accessible investment, Discovery Holding (NASDAQ:DISCA) (NASDAQ:DISCB) has certain things going for it. For one thing, its investment segment has 50% ownership in some well-known cable real estate, including the Discovery Channel suite of stations, TLC, Animal Planet, the Travel Channel, and BBC America, to name a few. However, Discovery Holding gets more complicated from there.
But before we dig too deep, let's not overlook what's in plain sight, because Discovery Holding's third-quarter earnings from earlier this week suggest that things don't look so good on the surface. (Check out our Fool by Numbers for the full rundown.) Net income was negative $77 million, for a loss of $0.27 per share. Revenues increased only 1% to $170 million. Its margins all decreased. Cash fell 33%, and although free cash flow improved, it's still at negative $2.1 million, compared with a negative $12.7 million figure as of the same quarter last year.
When Discovery Holding was recommended in the pages of Motley Fool Inside Value, it was made clear that the value in this stock and its ample cash-generating abilities is masked by its complexity. It may be named Discovery Holding, but its operating segment is called Ascent Media, which provides services to the TV and film industries. Its investment segment shares ownership in the Discovery Communications properties I named above with Cox and Newhouse.
Discovery Holding was spun off from Liberty Media (NASDAQ:LINTA) (NASDAQ:LINTB) in July 2005. And Liberty's John Malone was buying up millions of Discovery Holding shares last year at this time. Part of the Inside Value investment thesis for Discovery Holding last year was that its management has a history of turning complicated transactions like this one into financial successes.
Case in point: Discovery Communications' cash flows and operating results are not included in the holding company's financial statements, and so Discovery Holding's numbers appear to be deceptively lacking. However, the company does break out Discovery Communications' results, and there's a different story to be found there -- one that's not so negative. In fact, Discovery Communications' total revenues increased 13%, including a 21% increase in distribution revenue and a 3% increase in ad sales. Its total operating cash flow increased 13%.
In closing, it appears there is a dichotomy between Discovery Holdings' reported numbers and those of its related entity Discovery Communications -- and apparent "hidden" values that aren't easily seen or calculated. There are plenty of smart people over at Motley Fool Inside Value, and I have great faith in them -- and this past September, Inside Value guest analyst Bill Mann gave a refresher course on Discovery Holding and sticks with his positive thesis on the company. I'm certainly not prepared to disagree with him, but when I'm looking for potential investments, I'll choose relative simplicity over complexity any day. Discovery Holding just doesn't fit the bill for me, with its complicated structure and accounting. It all brings to mind some important investing lessons that we should all remember and heed: know your limitations, and buy what you know or can at least understand.
In the meantime, Discovery Holding shareholders, I salute you.
Discovery Holding is a Motley Fool Inside Value recommendation. To find out all the stocks that Philip Durell has suggested are great bargains for investors, take a 30-day free trial.
Alyce Lomax does not own shares of any of the companies mentioned. As of this writing, she was rated 1,370 out of 12,968 in Motley Fool CAPS. You can check out the Fool's new stock-rating community, too -- there's no cost to join.
