Analyst Cuts Discovery Communications Stock Rating to 'Sell' After Runup

Discovery Communications CEO David Zaslav

Pivotal Research's Brian Wieser reduces his price target by $3 after the stock sets a 52-week high, arguing "this level of market outperformance is not sustainable."

Pivotal Research Group analyst Brian Wieser on Monday downgraded his rating on the stock of Discovery Communications from "hold" to a rare "sell."

He also cut his price target on the shares of the cable networks giant, led by CEO David Zaslav, from $73 to $70.

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"The stock is up substantially in recent weeks, up by 11 percent in the last month (versus 4 percent gains for the S&P 500)," Wieser wrote in a report. "Our view is that this level of market outperformance is not sustainable given the relatively lofty valuation it began the year with."

On Friday, the stock closed at $85.07 after hitting a 52-week high of $85.09. That gave the company a market capitalization of $30.5 billion, according to Bloomberg.

Looking at earnings-per-share estimates, at current stock prices, "Discovery trades at 25 times current year earnings per share versus the S&P at 15 times, CBS at 17 times and Viacom at 14 times," Wieser said. "Is Discovery's premium warranted? We don't think so."

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He added: "While the market won't necessarily change its collective view anytime soon (especially if we continue to see solid revenue and bottom-line growth in coming quarters), the degree to which investors look past valuation metrics seems unsustainable to us, and we would prefer to move aside before the market reorients itself. The market is either implicitly assuming growth, which significantly outpaces the industry in perpetuity, or is willingly accepting lower risk-adjusted returns on equity from company-driven cash flows vs. similar alternatives."

He did acknowledge though that investors "understandably pursue growth and pay a premium for it, especially when the growth is being led by what is widely regarded as one of the best management teams in television" at Discovery. He also agreed that Discovery has more room for growth given its relatively small size.

"But over extended time horizons, growth rates for Discovery and Viacom should converge," Wieser concluded.

Twitter: @georgszalai