Gary Mishuris of Silver Ring Value Partners presented his in-depth investment thesis on Discovery Communications (Nasdaq: DISCA) at Best Ideas 2018.
Discovery is undervalued because (i) the company has a meaningful competitive advantage based on its brands, distribution, and content library; (ii) the market is correct about the presence of secular challenges in the U.S. media market, but is wrong about their magnitude; (iii) the market is underestimating the long-term resilience and growth potential of Discovery’s international business; and (iv) the announced Scripps Networks (SNI) acquisition does pose meaningful risks, but at the same time if it is successful, it is likely to meaningfully improve the company’s competitive position, earnings power, and value per share. On a standalone basis, Discovery trades at under 45% of Gary’s base case value estimate, but with 55+% downside to his worst-case estimate (which includes an unfavorable outcome of the SNI acquisition).
Because of this, Gary has structured the investment in combination with a $15 January 2020 put option. This gives up some expected return, increasing the base case price to value relationship from 42% to 48%, while at the same time substantially reducing the downside to the worst-case to a more manageable 28%. Given that the next two years are likely to resolve the success or failure of the SNI acquisition, and somewhat likely to provide material information on whether Gary is right on the magnitude of the structural issues facing the industry and the company, the put option makes sense, as it is one-time insurance against a specific adverse outcome rather than an ongoing cost of the position. As a sanity check, the stock plus the put option combination recently traded at under 7x Gary’s estimate of 2020 post-integration EPS, a point in time during which the company should be at a sustainable level of financial leverage.
About the instructor:
Gary Mishuris is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. Prior to founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the US Focused Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen Investments (later part of Wells Capital Management) where he started as an Equity Analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a S.B. in Economics from the Massachusetts Institute of Technology (MIT).
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