Entertainment

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

No one is ready for 2016 to be over more than Discovery Communications. 

Before Tuesday, the $16 billion owner of the Discovery Channel and TLC had posted the worst 12-month performance among the main entertainment media stocks. Its ratings have trended downhill in the U.S., and margins have compressed from past years.

More Work to Do
A 10 percent boost to adjusted operating income before depreciation and amortization from its U.S. networks helped Discovery's profit top estimates. Is it stabilizing or is this temporary?
Source: Bloomberg

With a bigger international presence than all of its closest rivals, Discovery is feeling more strongly the painful effects of Britain's vote in June to exit the European Union and foreign-exchange fluctuations. CEO David Zaslav also said the decision to move up Discovery's previously hugely successful "Shark Week" to early July from August this year was a mistake. And both the Olympics and American presidential campaign will drain U.S. viewers to other stations, including Fox News and NBC, until at least early November.

However, Discovery was still able to pull off stronger-than-expected earnings for the second quarter, supported by growth in the affiliate fees it earns from cable and satellite providers. While advertising sales will be down in the third quarter, it expects a rebound after that. The company also raised its forecast for earnings-per-share growth to 25 percent from an earlier forecast in the high teens. This all lifted the stock 6 percent, its biggest rally in more than two years. (And don't forget that Discovery counts among its shareholders billionaire John Malone, who controls 21 percent of the voting power.)

Discovery's Decline
Concerns that it will lose out in the shift to skinny bundles and TV streaming services have hurt Discovery's stock. But a surprisingly strong quarter gave it a boost Tuesday.
Source: Bloomberg

What this says is that obstacles specific to 2016 may be overshadowing a brighter picture at Discovery than some have given Zaslav and his team credit for. Cord-cutting and skinny bundles aren't (yet) as scary as they were originally made out to be for niche station owners like Discovery, although none of its networks are on Dish's Sling TV or Verizon's Custom TV base package. And Europe isn't all bad. Zaslav described a "tale of two cities," in which northern Europe continues to be challenging -- with Brexit weighing on advertising, pricey cable hindering growth and the high penetration of streaming services like Netflix magnifying competition -- while the rest of the region delivers solid results. 

Balancing Act
Unlike its biggest rivals, Discovery's revenue is split almost evenly between the U.S. and rest of the world. That's been both a benefit in terms of growth and a drawback because of Brexit fallout and currency fluctuations.
Source: Bloomberg
*Includes Canada

Longer term, the challenges for businesses dependent on TV advertising and traditional programming distribution aren't going away, but there's more time to adapt. After November will be what really matters. Until then, Discovery investors can take comfort knowing that they most likely don't need to brace for any near-term bad surprises.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net