– By GF Value
The stock of Discovery (NAS:DISCA, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $41.9 per share and the market cap of $18.6 billion, Discovery stock appears to be significantly overvalued. GF Value for Discovery is shown in the chart below.
Because Discovery is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10% over the past three years and is estimated to grow 3.63% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Discovery has a cash-to-debt ratio of 0.14, which is worse than 83% of the companies in the industry of Media – Diversified. The overall financial strength of Discovery is 4 out of 10, which indicates that the financial strength of Discovery is poor. This is the debt and cash of Discovery over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Discovery has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $10.7 billion and earnings of $1.81 a share. Its operating margin of 25.58% better than 92% of the companies in the industry of Media – Diversified. Overall, GuruFocus ranks Discovery’s profitability as strong. This is the revenue and net income of Discovery over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Discovery is 10%, which ranks better than 76% of the companies in the industry of Media – Diversified. The 3-year average EBITDA growth is 30.5%, which ranks better than 83% of the companies in the industry of Media – Diversified.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Discovery’s return on invested capital is 7.19, and its cost of capital is 7.76. The historical ROIC vs WACC comparison of Discovery is shown below:
In closing, The stock of Discovery (NAS:DISCA, 30-year Financials) appears to be significantly overvalued. The company’s financial condition is poor and its profitability is strong. Its growth ranks better than 83% of the companies in the industry of Media – Diversified. To learn more about Discovery stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.