Discovery Shares Tumble 3% Following Bernstein's Downgrade To Underperform

Discovery Communications Inc. DISCA lost more than 3.5 percent on Tuesday. The drop could be attributed to a downgrade from Bernstein.

Analyst Todd Juenger lowered the stock to Underperform, with a $23 price target.

"We are launching a crusade to abolish references to P/E multiples for media stocks," Juenger said. Aside from Walt Disney Co DIS, these media companies "are levered. While many of our companies have finally begun to acknowledge the structural changes facing their businesses, the capital structures are still built for the good old days. Leverage is great for equity holders when companies are growing and the future is stable; not so in the opposite."

"We are only interested in valuation metrics that consider cash flows/earnings to the entire enterprise," the analyst continued. "The ideal measure would be EV/Unlevered FCF; but a much simpler metric is EV/EBITDA. Since media co's don't have much CapEx (ex-Disney) and generally similar tax rates, we believe EV/EBITDA is a fair, simple valuation metric, certainly far superior to P/E."

The market agrees, according to Juenger, "which is why the P/E multiples for these stocks (absolute and relative) look so much more attractive than EV/EBITDA."

Discovery is the biggest victim of this methodology change because it "trades at low-double-digit PE, high-singledigit FCF yield to equity. But it trades at ~11x EV/EBITDA, and rather than reducing leverage, the company is increasing it. There are positives and negatives about DISCA's competitive positioning, but as we run through the pros/cons, in the end it wasn't even a close call."

Shares closed at $27.85, down 3.57 percent.