Discovery Communications’ 20% Gain Difficult To Justify, Pivotal Says In Downgrade

Discovery Communications Inc. (NASDAQ: DISCA) shares have gained 20 percent over the past month, a move that’s difficult to justify, according to Pivotal Research Group. 

The Analyst

Pivotal’s Brian Wieser downgraded Discovery Communications from Hold to Sell with an unchanged $26 price target.

The Thesis

Discovery Communications’ stock moved higher over the past month after announcing new agreements with Hulu and and a new distribution with Sling, Wieser said in the downgrade note. (See the analyst’s track record here.)

In addition, the management team presented at an industry conference and offered positive commentary on cost savings related to the Scripps acquisition and positive advertising trends, the analyst said. 

This begs the question: are these encouraging catalysts compelling enough to boost the stock higher by 20 percent?

The answer is no, as the new deals won’t meaningfully change Discovery’s fundamentals, Wieser said. The national TV advertising business remains challenging, and any near-term revenue boost is more a result of an industry-leading increase in ad loads.

The synergies generated from Scripps are notable, yet the company faces higher costs for content production, higher marketing costs and technology expenses for its direct to consumer services, the analyst said. The synergies won’t be able to offset incremental expenses, and the company is likely to show margin erosion, he said. 

Discovery’s 2019 outlook does look incrementally better after a series of encouraging announcements, but they aren’t compelling enough to justify the recent uptick in valuation, according to Pivotal Research. 

Price Action

Discovery Communications shares were down 2 percent at $31.38 at the time of publication Tuesday. 

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