Goldman Sachs Downgrades Shares of Discovery, Scripps Networks

Analyst Drew Borst cites near-term ratings and advertising growth challenges, but likes the cable network stocks longer-term.

NEW YORK - Goldman Sachs analyst Drew Borst on Tuesday downgraded shares of Discovery Communications and Scripps Networks Interactive from "neutral" to "sell," citing near-term ratings and advertising growth challenges.

"Given notably difficult U.S. advertising comparisons in the first half of 2011, weak TV ratings over the past several quarters and comparatively high price/earnings multiples, we view both stocks as potential underperformers relative to our entertainment and Internet coverage universe," he said in a report about the cable networks firms.

But he reiterated his long-term confidence in the two companies. "We still expect overall U.S. advertising to remain strong, continue to like the quality of the companies’ managements, and believe in the sustainability of the affiliate fee model," Borst said.

As the advertising recovery gained speed in the first three quarters of 2010, Discovery Communications' and Scripps' U.S. ad growth was in the low to high teen percentages, outpacing the industry, making for tough comparisons this year, the Goldman analyst highlighted.

Meanwhile, Scripps Networks ratings have declined 2 percent to 5 percent year-over-year for four consecutive months, Borst said. And Discovery Communications ratings growth "has hovered at +/-1 percent in five of the past six quarters, including -1 percent year-over-year in the fourth quarter," he said.