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Discovery Communications Inc. (DISCA), Scripps Networks Interactive, Inc. (SNI): TV Stocks to Watch Closely

In show business everybody wants to be under the spotlight, not just actors. As higher ratings means higher revenues, media companies compete hard to outperform their peers. Entertainment firms like Discovery Communications Inc. (NASDAQ:DISCA), Scripps Networks Interactive, Inc. (NYSE:SNI) and CBS Corporation (NYSE:CBS) certainly know a thing or two about delivering highly sought-after TV content, yet face different prospects and growth opportunities. Let’s take a closer look at them and see if they could entertain you portfolio.

Discovering the world

Discovery Communications Inc. (NASDAQ:DISCA)Discovery Communications Inc. (NASDAQ:DISCA) is an American world-renowned entertainment company, which owns the popular Discovery Channel, Animal Planet and The Learning Channel among other cable networks. The firm holds a vast content portfolio and has a remarkable track record of producing inexpensive and remarkably profitable television content that has a global appeal.

The company’s recent move towards reality-based programming granted Discovery Communications Inc. (NASDAQ:DISCA) a record in domestic viewership, and with domestic and international revenues increasing, the company’s stock has surged 62% during the last 12 months. Discovery trades at $81 or 32.8 times its earnings, at a 44% premium to the industry average, but offers industry-leading margins. Is it a buy? I’d consider it is.

My case rests on the international growth the firm has, and should continue to experience. Although domestic pay-TV penetration is very high, the international pay-TV market is not yet mature and holds enormous growth potential for the next decade, especially in emerging markets where pay-TV penetration is well below 50% (for example, Brazil). Discovery Communications Inc. (NASDAQ:DISCA), who managed to establish its networks on concentrated international pay-TV platforms a long time ago, is more than well positioned to benefit from this growth.

On the downside, my immediate concern regarding Discovery Communications Inc. (NASDAQ:DISCA) is that advertising represents about half of the firm’s revenue, a higher proportion than some of its peers. This means that Discovery’s revenue is very sensitive to any economic slowdown or pullback in ad spending that may take place in the near future.

What a lifestyle

Scripps Networks Interactive, Inc. (NYSE:SNI) is an American media company focused on lifestyle content. The company’s cable networks include Home & Garden Television and Food Network, which combine to generate about two thirds of the firm’s revenue and hold a wide and loyal audience in the domestic market. With relatively inexpensive programming compared to its peers, and particularly attractive to advertisers (due to the economic position of its audience), Scripps’ flagship networks are remarkably profitable, generating estimated EBITDA margins well beyond 50%.

Trading at $71 or 15.9 times its earnings, Scripps Networks Interactive, Inc. (NYSE:SNI)’ shares have gained over 20% during 2013 and offer industry leading margins and returns. My take? This is definitely a stock to watch.

The company’s last reported quarterly results beat analyst estimates thanks to substantial growth in advertising and affiliate-fee revenue — up 10% and 8.5% year-over-year, respectively. Both sources of revenues are expected to remain healthy in the near future, particularly affiliate-fees. The appearance of new players in the video distribution market (like telecom companies Verizon and AT&T) should give more bargaining power to owners of popular pay-TV content when negotiating affiliate fees with cable and satellite companies.

As with Discovery, my concern about the company is that an enormous percentage of its revenue (in this case, approximately 70%) derive from marketing and advertising, making Scripps Networks Interactive, Inc. (NYSE:SNI) particularly sensitive to macroeconomic conditions or changing trends in ad spending. In addition, it should be mentioned that unlike many of its peers Scripps Networks Interactive, Inc. (NYSE:SNI) has yet been unable to grow in the international market.

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