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Silver Ring Value Partners - Discovery Inc.

Fund Letter Stock Ideas profile picture
Fund Letter Stock Ideas
11.04K Followers

Summary

  • Discovery Communications thesis has been tracking well.
  • Yet, the stock continues to trade at less than 8x times profits and free cash flow as the market worries about declining TV ratings, the threat to the cable bundle and the implications for the company's terminal value.
  • Discovery is our largest position and I strongly believe that I am right.

The following segment was excerpted from this fund letter.

Discovery Communications (DISCK)

Discovery Communications thesis has been tracking well. The company has de-levered its balance sheet and brought leverage below its target levels. Organic sales growth has been low single digits or higher consistently, in stark contrast to the market fears of an inevitable decline. Free cash flow has been prodigious, rising to ~ $3B in 2019. The company has begun to buy back its shares, using $650M of cash for that purpose in 2019, or over 3% of the market capitalization. Yet, the stock continues to trade at less than 8x times profits and free cash flow as the market worries about declining TV ratings, the threat to the cable bundle and the implications for the company's terminal value.

When I increased the position size to a large position with the stock in the mid-teens in 2017, I hedged that with January 2020 put options. The main reason for the hedge was the finite-duration risks of an over-levered balance sheet and integration risks post the Scripps acquisition. These risks are now behind us with the company navigating them well, and the stock is almost double the price it was at the time when I made it a larger position. Continuing to hedge the position doesn't make sense as 1) it is too expensive to continuously hedge with put options and 2) there are now no finite duration specific risks that would justify a one-time hedge. As such, I let the last put options expire in January.

Without the hedge, the position would have been 24% of the partnership's assets. That is too high given the downside to the worst case, as it would have caused Portfolio at Risk (PaR), which I define as Position Size x Downside to Worst Case, to exceed my maximum of 10%. Therefore, I

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Fund Letter Stock Ideas profile picture
11.04K Followers
Single stock ideas excerpted from fund letters published by Seeking Alpha.

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Comments (9)

K
Is anyone looking at VIAC here? One would think Netflix, Amazon, and Apple if they are serious about competing for eyeballs in the long term in TV would need content to compete with T, Comcast, and Disney. Am I wrong? Why are DISC, AMC, and VIAC trading like energy companies??
D
The tech disrupters are making own content and driving up prices for scripted contents in process.
D
DISCA differs from AMC and VIAC because it’s global and is making very good progress (better than Disney) in DTC.
K
Nevermind Scripps was 2018. Not sure about 2019 but I'm gonna look into it now...
Michael Wiggins De Oliveira profile picture
@KMMST66
I saw that too... I believe it was to do with non-controlling interests that were made on the back of the Scripps acquisition.
K
They made an aquisition Scripps. Used some shares as payment I assume. That's why share count is up despite buying back 23M shares in 2019
l
The thing I don't understand is how they are spending all this money on share buybacks and shares outstanding isn't decreasing? Other than that I agree with the Discovery thesis
D
Share count went down 2% in 2019. Projected to decline over 3% in 2020. Likely higher than 3% as they should be more aggressive buying back stocks now.
PermaBear1990 profile picture
Wow, we have similar investment process it seems. Care worked well for me and id's over is my 2nd largest position and I'm adding. So much cash flow and great content.
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