On Wednesday, Hotchkis & Wiley disclosed it chopped 46.31% off its stake in Discovery Inc. (DISCA, Financial), a company that underperforms top entertainment companies like Netflix Inc. (NFLX, Financial), Walt Disney Co. (DIS, Financial), Twenty-First Century Fox Inc. (FOXA, Financial) and Time Warner Inc. (TWX, Financial), on April 30.
Trade details
The firm sold 9,867,563 Class A shares for $23.65 per share. Based on GuruFocus estimates, Hotchkis & Wiley recorded a loss of approximately 15% on the stock.
Company reported poor quarterly earnings despite Scripps acquisition
Silver Spring, Maryland-based Discovery reported 1 cent in diluted loss per share despite revenues increasing 43% year over year.
CEO David Zaslav said the first quarter highlighted a “historic and pivotal period” for Discovery, which included the acquisition of Scripps Networks International Inc. (SNI, Financial). Despite this, the transaction costs associated with the acquisition and other restructuring costs contributed to an as-reported net loss of $8 million, down approximately $223 million from the prior-year quarter.
Company lags competitors in profitability and quality
GuruFocus lists four severe warning signs for Discovery, including contracting operating and gross margins. Additionally, the company issued approximately $9.2 billion in long-term debt over the past three years, including $8.566 billion in the trailing 12 months. Discovery’s debt-to-EBITDA ratio of 9.56 is significantly higher than Joel Tillinghast’s safe threshold of 4 and underperforms 96% of global competitors.
Although Discovery has a higher operating margin, Discovery’s pretax margin and net margin lag those of Disney, Netflix, Fox and Time Warner, as Table 1 illustrates. Discovery also has the highest debt-to-equity ratio among the companies listed in Table 1, suggesting the Maryland-based company is highly leveraged.
| Financial metric | Discovery | Industry median | Competitors | |||
| Disney | Fox | Netflix | Time Warner | |||
| Operating margin | 27.13% | 12.14% | 25.03% | 20.35% | 8.06% | 24.55% |
| Net margin | -7.40% | 9.09% | 20.16% | 13.50% | 5.26% | 17.33% |
| Pretax margin | -5.68% | 6.83% | 24.57% | 13.85% | 4.40% | 17.64% |
| Debt to equity | 2.46 | 0.87 | 0.55 | 1.08 | 1.63 | 0.75 |
Table 1
See also
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Disclosure: No positions.
