Bank Of America Explores The Discovery Communications Bull Case

Bank of America Merrill Lynch upgraded Discovery Communications Inc. DISCA, buying into the thinking behind the Scripps Networks Interactive, Inc. SNI deal. 

Discovery is acquiring Scripps for $14.6 billion in cash and stock.

The Analyst

BofA Merrill Lynch analyst Jessica Reif Cohen upgraded her rating on Discovery Communications from Neutral to Buy and raised the price target from $26 to $30.

The Thesis

Discovery Communications shares are poised to begin pricing a more robust synergy outlook, as the closing of the Scripps deal approaches in the late first quarter of 2018, Reif Cohen said in a Thursday note. (See the analyst's track record here.)

Discovery's outlook will be supported by incremental cost opportunities across global marketing and programming activities and potential revenue upside through improved U.S. advertising and accelerated Scripps Network international expansion efforts, the analyst said.

BofA estimates the combined company can delever by three turns between now and 2021. If the combined company can be managed toward Discovery Communication's 3.5 times gross leverage ratio, Reif Cohen said a sizable $9.5 billion will be available for potential share repurchases.

"We also view the stock's risk/reward favorably, as the upside implied by our bull case $36 per share scenario appears 1.8x greater than the downside risk of poor execution and multiple compression (a $14 share price)," the analyst said. 

The Price Action

Discovery Communications is down about 16 percent year-to-date.

Shares of the company ended Thursday up 4.43 percent at $23.26. 

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