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James Li
James Li
Articles (464)  | Author's Website |

Hotchkis and Wiley Trims Discovery Stake

Company lags top competitors in profitability and quality

On Wednesday, Hotchkis & Wiley disclosed it chopped 46.31% off its stake in Discovery Inc. (NASDAQ:DISCA), a company that underperforms top entertainment companies like Netflix Inc. (NASDAQ:NFLX), Walt Disney Co. (NYSE:DIS), Twenty-First Century Fox Inc. (NASDAQ:FOXA) and Time Warner Inc. (NYSE:TWX), 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.

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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.

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CEO David Zaslav said the first quarter highlighted a “historic and pivotal period” for Discovery, which included the acquisition of Scripps Networks International Inc. (NASDAQ:SNI). 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

GuruFocus launched detailed industry overview pages that allow you to view the median valuation and quality ratios for a specific industry or sector. Premium members have access to a wide variety of features, including up to 30 years of historical financial data, competitive analysis and warning signs, real-time guru trades and the aggregated portfolio of gurus.

Disclosure: No positions.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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