Is The Sky Falling For Discovery Communications?

Investors will have their plates full when Discovery Communications Inc. DISCA announces its quarterly earnings on February 14, as the media company is battling a dispute with its largest European distributor, Sky, over channel fees.

Ongoing Dispute

“The dispute creates an unanticipated downside risk to DISCA's international affiliate revenue growth in 2017, which adds to the headwinds we have previously flagged in domestic advertising,” Credit Suisse analyst Omar Sheikh wrote in a note.

Discovery is likely to provide guidance for the forthcoming year at the time of earnings. Investors would focus on any changes to Discovery’s international affiliate revenue growth guidance that currently calls for a growth at a "low double digit run-rate" over the next several years.

“The longer the Sky dispute lasts, the greater risk there will be to that guidance, in our view,” Sheikh highlighted.

Sheikh estimates that the issue would hit 11.5 million pay TV subscribers, amounting to under 4 percent of Discovery's approximately 310 million international subscribers. The analyst projects the annualized revenue impact on Discovery of losing Sky distribution in the region of $110 million.

“Assuming a three-month dispute with no cost offset, this would mechanically translate to a 2 percent drag on 2017 EPS,” Sheikh noted.

At last check, shares of Discovery Communications had risen 1.78 percent to $28.07. Sheikh has an Underperform rating on the shares, with a price target of $23.