Discovery Analysts Split on Stock Outlook

Discovery Communications CEO David Zaslav

One Wall Street observer sees "an attractive buying opportunity" after recent declines, while another says recent acquisitions in Europe could continue to weigh on the stock.

Wall Street analysts on Friday published different views on the outlook for the stock of Discovery Communications after the cable networks group reported fourth-quarter financials and provided 2014 guidance slightly below expectations.

Michael Morris, analyst at Guggenheim Securities, on Friday upgraded the stock of Discovery, led by CEO David Zaslav, from "neutral" to "buy."

"The year-to-date underperformance of shares relative to peers (-10.3 percent versus -2.5 percent for our universe of entertainment stocks) and the expectations reset provided in management's 2014 outlook provide an attractive buying opportunity," Morris wrote in a report. "While the company saw disappointing domestic ratings in the fourth quarter, it remains an industry leader in international channels growth."

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He also highlighted several positive trends that he said would "bring investor interest back to the shares," including improved first-quarter ratings at Discovery, TLC and OWN, the fact that international audience and ad trends "remain strong" and that "we expect OWN should generate meaningful positive cash flow and earnings in 2014."

Not all are that bullish after a strong run-up in the stock in 2013 and recent weakness in Discovery shares.

MKM Partners analyst Eric Handler maintained his "neutral" rating and $88 price target on Friday. "The impact of margin-dilutive [European] acquisitions (SBS, Eurosport) will likely weigh on the share performance until incremental revenue synergies can be extracted or the company's margin outlook strengthens," he said.

And MoffettNathanson analyst Michael Nathanson noted that "Thursday morning’s fourth-quarter earnings release was overshadowed by the surprising news that Comcast had offered to acquire Time Warner Cable." He added: "For those that missed the conference call and the press release, we would sum it up as complicated." 

Discussing his take on the stock, Nathanson said: "A year or so ago, the narrative for the stock was simple: Discovery provided top of the industry advertising growth and [operating cash flow] margins at both its U.S. and International businesses. While it still leads the world in margins, there seems to be a lot of “noise” in the reported earnings per share numbers that has resulted in misses versus consensus earnings per share estimates."

Twitter: @georgszalai