Barclays Cuts Discovery Communications To Equal-weight

• Discovery Communications Inc. DISCA shares are down 18 percent year-to-date, having declined steeply over the last three months.
• Barclays’ Kannan Venkateshwar downgraded the rating on the company from Overweight to Equal-weight, while reducing the price target from $34 to $30.
• The longer-than-anticipated timeline for growth in the company’s operating leverage is disappointing, Venkateshwar noted.

Analyst Kannan Venkateshwar mentioned that Discovery Communications is well positioned to grow operating leverage and has a highly stable domestic business, which differentiates it from other players. He added, however, that the company has indicated a potentially longer-than-anticipated time horizon for the operating leverage to kick in.

Discovery Communications expects EBITDA margin at Eurosport and its new OTT platform to be 5-15 percent over the next three years. This compares with the Barclays estimate of nearly 18 percent margin expansion at Eurosport by 2018.

“While there is likely some degree of conservatism in this guidance, and we recognize that Eurosport’s margin profile is lower than what it had before DISCA acquired it, even after five years of investment, we believe the lowered guidance is likely driven by more than just conservatism,” Venkateshwar wrote.

Uncertainty around advertising and pay TV subs is expected to continue exerting pressure on the multiples and lead to a weakening of the overall valuation of the industry relative to the broader markets, the analyst noted.

Venkateshwar expects Discovery Communications to cut buybacks at a time when they “could actually be accretive, as it tries to meet the rating agency guidelines.”