Discovery Gets Rare Stock Sell Recommendation, Reliance On Core Brands Cited

Ahead of its quarterly earning report, Discovery Communications got a rare sell recommendation from a stock market analyst because of a too pricey valuations in recent weeks.

In contrast to its peers -- such as Viacom and CBS -- Discovery has seen its stock price way up versus its current earnings per share --- some 25 times earnings per share (EPS), says Brian Wieser, senior research analyst at Pivotal Research Group.  

Discovery closed at $85.07 on Friday. Mid-day Monday trading saw the stock at $84.81, down 0.3% versus its Friday close. Wieser revised price target for the company is now at $70 a share -- it had been at $73 a share.

Discovery’s 25 times EPS much higher than the broader S&P 500 companies which average 15 times EPS. Among other media companies, CBS sits at 17 times EPS and Viacom, 14 times EPS. Wieser write: “Is Discovery's premium warranted? We don't think so.” All this comes ahead of Discovery Communications second quarter earnings report due July 30.

Many media companies have seen their stock prices climb in recent months, versus a broader group of publicly traded companies. Wieser notes Discovery, Viacom and CBS are up around 30% year to date, while the S&P 500 is up around 15%.

He also warns: “Investors in Discovery will need to be conscious of the company's reliance on a handful of core network brands, which collectively account for small share of total TV viewing,”

Also investors need to be wary about “misguided perceptions” from analysts predicting the downfall of TV in general, as well as a drop in pay TV subscription revenue of which Discovery -- and other companies -- depend on.

Wieser did acknowledge current market conditions, lauding Discovery's management team, noting: "To some degree, Discovery has more room for growth given its relatively smaller size. But over extended time horizons, growth rates for Discovery and Viacom should converge given their common dependence on cash flow growth, which is driven by mostly identical revenue sources and operating conditions.”

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