Discovery Inc., which is acquiring WarnerMedia‘s assets in a Reverse Morris Trust-fueled tax free deal, saw its stock slip by 19 cents to $31.28, on Monday.
Could a further slice of its share price be on the way, following a downgrade from an influential Wall Street watcher?
Michael Nathanson, the Senior Analyst with MoffettNathanson, along with the firm’s Robert Fishman, have spent some time further digesting the Discovery/WarnerMedia merger.
While the analysts give high marks to Discovery “for the boldness of their action and the long-term value creation that could be HBO Max,” it also appears likely that Discovery’s stock “will be stuck over the near-term.”
As such, MoffettNathanson is downgrading Discovery to Neutral.
And, there is a reduced target price of $37 now in place for DISCA.
That’s still better than where it sits today. And, the long-term benefits were calculated by Nathanson and Fishman. But, it is a drop from $51 per share.
New 2022 EPS for Discovery has been computed to be $3.25, up from $3. It’s 2021 that Discovery has to claw through, as its adjusted EPS for the year is now $2.79 on a conservative basis, down from $2.80.
While the WarnerMedia deal, they opine, “will go down as personal career highlights for
Discovery’s management, board and advisors,” Nathanson and Fishman believe “the near-term impact on shareholders is likely to be more muted.”
But, what about that upgrade for Discovery earlier this year? That was based on discovery+ not being fully appreciated by the market. Strong free cash flow was seen. Lower cost non-scripted content was a plus. And, “if the discovery+ pivot didn’t work,
we thought Plan B for the company would be a sale to another company or an LBO,” the MoffettNathanson analysts note.
Instead, Discovery was the acquisitor, not the party being acquired.
And, that creates a different dynamic for MoffettNathanson.
“As it stands now, the new company will be a highly leveraged play on the domestic cable networks model with options on two DTC pivots – HBO Max and discovery+,” Nathanson and Fishman conclude. “The inclusion of Turner’s general entertainment basic cable networks muddies the water in our call that legacy Discovery could accretively pivot with discovery+.”
In their view, an “immediate need to quickly scale HBO Max” could prove to be a huge undertaking, and presents a “major operational shift.”
They conclude, “With an immediate focus on reducing heightened leverage, investors will likely be concerned about the potential to starve content investment in this highly competitive arena.”
