Analyst Lowers Discovery Earnings Estimates, Citing "Ratings Rut," Russia

Discovery Channel
Discovery show 'Bering Sea Gold'

Russia's ban on cable advertising as of 2015 and political unrest in Asia weigh on financials, he says

Jefferies analyst John Janedis on Wednesday lowered his second-half 2014 and 2015 earnings estimates for Discovery Communications, citing a recent "ratings rut" and advertising issues in Russia.

He explained that the reduction came amid "continued ratings weakness on its three key networks [Discovery, TLC and Animal Planet], a change in legislation in Russia, which no longer permits cable network advertising in the country, and general weakness in international advertising with the World Cup and political unrest in Asia."

Janedis reiterated his "hold" rating on Discovery's stock.

Discovery CEO David Zaslav recently said ad trends were running "a little bit" behind target. "While we think risk to '14 guidance is well appreciated, we also see risk to '15," Janedis said Wednesday.

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Citing Nielsen live+same day ratings for the company's big three networks, which were down 5 percent, 23 percent and 21 percent, respectively, in their key demos, the analyst wrote: "Accounting for about 70 percent of U.S. revenues, we see risk to Discovery's "at least" mid-single digit ad revenue guidance. We are lowering our U.S. ad growth rate to 2.8 percent (prior 4.5 percent)."

He also cut his fourth-quarter U.S. ad estimate for the firm to 4 percent growth from 6.5 percent. "While new programming will start to hit the nets, it may be difficult to immediately monetize," Janedis said.

He also touched on a recent Russian law banning all cable TV advertising starting in 2015. "We believe advertisers have started to pull back ahead of the change, weighing on third-quarter/fourth-quarter ad growth, with the greater impact in '15," Janedis wrote. "Assuming Russia accounts for about 4-5 percent of Discovery's international business, we are lowering our third-quarter, fourth-quarter, 2015 estimates."

Discovery's international networks have been key growth drivers for the company and have done well despite challenges in select markets. The international business will this year account for more than 50 percent of the company's revenue for the first time.

Twitter: @georgszalai