Discovery: Upgrading to Buy From Hold -- Pivotal Research

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We are updating our Discovery model, raising our target price to $28 on a YE2018 basis from $24 previously, and upgrading the stock from Hold to Buy. While there are many legitimate concerns about the company’s strategic position vs. its peers and around the industry in which it operates, at current trading levels upside potential is too significant to ignore. As well, as a still-relatively smaller player in a consolidating sector, we can imagine benefits to the stock from future M&A activity whether because Discovery is itself eventually bought at a premium or because it acquires other assets and realizes further synergies beyond those generated by the Scripps transaction.

A review of our perspective on the company, underlying data and the stock follows in this note.

RISKS. Discovery investors face risks from 1) reliance on a handful of core network brands 2) perceptions by many investors and industry participants regarding the “death of TV advertising”, and 3) deceleration in pay TV subscription growth or reduced ARPUs around the world.

VALUATION: We value Discovery using a DCF, with a near-term discount rate of 6.1%, a long-term discount rate of 13.5% and a 3.0% long-term growth rate.


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