Why Is Discovery Stock Down More Than 28% Year To Date?

Discovery Communications (NASDAQ:DISCA) has faced multiple headwinds like dwindling advertisement revenues, escalated debt levels and high costs so far in 2017. Consequently, shares of the company have declined 28.3%, significantly underperforming its industry’s rally of 10.3% on a year-to-date basis.

Lets have a deeper look into the headwinds.

Like its fellow-players in the broader media sector, Discovery is struggling due to the sluggish overall advertising market in the United States. The prevalence of cord cutting and the rise of online video streaming providers like Netflix (NASDAQ:NFLX) are huge challenges for companies like Discovery.

Moreover, Discovery’s third quarter 2017 results suffered due to the 5% decline in portfolio subscribers in the company's U.S. Networks unit. This loss in U.S. subscribers was higher than the comparable year-ago figure. The accelerating loss U.S. subscribers by Discovery is very concerning.

Below-par performance of the Education and Other unit is hurting the company as well. Furthermore, the fact that Discovery is a highly leveraged company poses a threat. This is indicated by the fact that the ratio of its long-term debt-to-equity (expressed as a percentage) is currently over 200. This compares unfavorably to the figure of 82.9 for the S&P 500 Index.

Again, Discovery's trailing 12-month return on equity (ROE) undercuts its growth potential. Not only has the company’s ROE of 22.2% declined in a year, it compares unfavorably with ROE of 39.3% and 16% for its industry, reflecting the fact that it is efficient in using shareholders’ funds.

Additionally, high operating expenses are hurting the company’s bottom line. Though positive on Discovery’s impending acquisition of Scripps Network (NASDAQ:SNI) , we note that costs are likely to increase further in the event of the materialization of the deal.

Not a Broker Favorite

Discovery's earnings estimates reflect the pessimism surrounding the stock. The company has witnessed the Zacks Consensus Estimate for current-quarter earnings being revised 37.7% downward, over the last 60 days. Also, the current-year earnings estimates have moved down 13% in the same time frame.

Given the wealth of information at the disposal of brokers, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions. This is because the direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

Zacks Rank & Style Score

Taking into account the above-mentioned headwinds, we believe that investors should stay away from the stock right now. Discovery's Zacks Rank #5 (Strong Sell) also supports our view, indicating that the stock is likely to underperform the broader market over the next one to three months.

Furthermore, the company’s Momentum Score of F highlights its short-term unattractiveness.

Stock to Consider

Investors interested in the sector may consider NTN Buzztime (NYSE:NTN) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>