JP Morgan Raises Target On Rovi From $23 To $34, Says AT&T-DirectTV Deal Is Price Floor

JP Morgan’s Sterling Auty maintained an Overweight rating for Rovi Corporation ROVI, while raising the price target from $23 to $34. He added that the deal between AT&T Inc. T and DIRECTV DTV is likely to have received preferential pricing due to its size as well as willingness “to be the first of the major renewals to sign a multi-year deal.

The 7-year, fixed-fee deal amounts to about $0.21/sub/month. The implication is that Comcast Corporation CMCSA and DISH Network Corp DISH would be able to command pricing at or above that of AT&T/DirecTV.

“Management reiterated prior commentary that it remains confident in its ability to sign the Big 2 Pay-TV providers without resorting to litigation. That confidence stems from the breadth of the patent portfolio and the proof points provided by recent licensing agreements with AT&T/DirecTV, Sky, Videotron, and Shaw, among others,” analyst Sterling Auty wrote.

Moreover, the analyst believes that Comcast is more likely to agree to renew its agreement, since it has recently expanded its metadata relationship with Rovi late in 2015. Despite this, management has been prudent to factor in a substantial increase in litigation expense in its FY16 guidance, to reflect the probability of not being able to reach an agreement with Comcast and Dish Network.

A higher multiple for Rovi is justified, “given the timely close of the AT&T / DirecTV deal, a high degree of confidence that the Comcast and DISH deals are consummated, and improving momentum in the product business,” Auty added.