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Discovery Drop Provides Great Entry Point

|Includes: Discovery Inc A (DISCA)

The Discovery Channel is a household name in the United States. Many investors would not be surprised to learn that the Discovery Channel is also available in international territories as well. Investors may be surprised to know that Discovery Communications (NASDAQ:DISCA) is the most widely distributed cable company in the world with multiple channels in key territories around the world. It continues to be that international growth and the company's valuable television real estate that makes Discovery Communications a worthy investment. With the recent pullback in shares, investors should be ready to jump in.

The third quarter saw revenue increase 14%, led by a 32% in the international segment. International advertising revenue grew 12% and was one of the keys to the strong quarter. The company bought back $298 million worth of shares in the third quarter, bringing the year to date total past the $1 billion mark. The strong international growth continued from the second quarter. My last article pointed out that international revenue grew 51% in the second quarter, compared to the 7% increase in the United States segment.

At the end of the third quarter, Discovery Communications had an average of eight channels in the 225 countries it operated in. In total, Discovery Communications has more than 3 billion cumulative subscribers around the world. The company's namesake Discovery Channel is available in more than 500 million homes around the world. TLC, a key part of the Discovery portfolio, is the world's leading female targeted channel with availability in 300 million homes in more than 200 countries. In Brazil, Discovery Kids is the number one pay television channel.

Latin America continues to be a strong point for Discovery Communications. Discovery Kids is number one in Brazil, which continues to be one of the biggest growth markets for television in the world. This number one position includes all cable channels, not just those targeting kids. The company now has 13 brands in the 49 Latin American countries it operates in. Ratings are up 20% in Latin America. The strong growth has helped Discovery earn double digit increases in affiliate and advertising revenue.

Along with strong international growth, Discovery is also seeing growth of its lesser known channels. Investigation Discovery is one of the world's fastest growing channels in the world. The channel recently launched in India and Norway and is well on the way of a goal of 100 million global homes. The Oprah Winfrey Network, a 50% owned joint venture, continued its strong growth. The channel is the number one rated channel for Tuesday, Wednesday, and Saturday nights among African American women. American Heroes Channel saw a 16% increase in viewership in the quarter. Destination America and Velocity also saw double digit increases in viewership.

Discovery's leading channels also had good third quarters. Discovery Channel saw a 10% increase in October viewership, led by the show "Gold Rush", the number one rated show among men on Friday nights. Discovery also aired the special "Skyscraper Live" in the current fourth quarter featuring Nik Wallenda walking on a tightrope blindfolded. The strong ratings of this event and the likely high priced ads should help boost the Discovery Channel in the current quarter. Also helping Discovery Channel going forward is the appointment of former Disney executive Rich Ross to be the channel's new president and help boost the channel into even more international territories and expand content.

TLC continues to dominate the ratings for women on cable networks. Also helping the channel is one of the channel's most popular shows "19 Kids and Counting". Two weddings of Duggar children has helped boost the ratings for the channel this season. The first wedding helped TLC have its highest audience in four years and made TLC the number one network for the night.

Discovery Communications forecasted full year revenue to hit a range of $6.30 to $6.35 billion, with weak foreign exchange ratings hurting worth than previously expected. Yahoo Finance lists an estimate of $6.3 billion for fiscal year revenue and earnings per share of $1.72. Going forward, fiscal 2015 has targets of $2.09 in earnings per share and $7.0 billion in revenue on Yahoo. That earnings target would give shares a price to earnings of almost 16. I think shares could easily trade back in a range of 20 times forward earnings, sending shares back above $40.

Shares of Discovery Communications ended Wednesday trading for less than $33.00. Over the last 52 weeks, shares have traded in a range of $31.29 to $46.38. As you can see, shares are trading very close to 52 week lows. After seeing a rise of 38% in 2013, shares of Discovery are down 28% in 2014. This media company has the content and distribution assets to continue to be a strong player. International growth and continued expansion should boost shares back to higher levels going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.