Pivotal Lifts Sell Rating Off Of Discovery's Stock

The bearish case for Discovery Communications Inc. DISCA can no longer be justified after the company's CEO spoke at the 46th Annual UBS Global Media and Communications Conference this week, according to Pivotal.

The Analyst

Pivotal Research Group's Brian Wieser upgraded Discovery from Sell to Hold with an unchanged $27 price target.

The Thesis

Discovery CEO David Zaslav spoke Monday and issued several cautious comments, including saying its flagship Discovery Channel "has some ratings challenges." Wieser said The main takeaway from the presentation is that the executive lowered expectations for advertising growth just a few weeks after initially setting them.

Pivotal's first-hand checks and conversations with national TV buyers suggests Discovery's problems extend beyond recent weakness at its flagship network, the analyst wrote in the note. Specifically, the company faces "unrealistic expectations" related to how much revenue the combination of Scripss and Discovery would realize as one entity. In addition, the conversations with TV buyers suggests the scatter market is "relatively soft."

Wieser said the TV business remains a "melting iceberg" characterized by declining ad revenues with slightly increasing distribution revenues but gradually worsening margins. As such, management's concerning comments this week has a minimal impact on valuation due to the negative longer-term view on the sector; With the stock trading near the firm's $27 price target, a Sell rating can no longer be justified.

Price Action

Shares of Discovery were trading higher by 1.3 percent to $28.27 Thursday morning.

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