Analyst Michael Nathanson of MoffettNathanson Research says that even though Discovery Communications stock has fallen since July when it announced it was acquiring Scripps Networks Interactive, he still recommends selling Discovery stock.
Back when the deal was announced, Nathanson noted that combining two cable network companies doesn’t address the issues facing the industry. Now, in a research note Monday, he said: “While the combination will no doubt generate massive cost savings, we are not sure that getting bigger is actually better.”
Nathanson said that Scripps’ run as an outperformer in both ratings and advertising revenue growth might have ended. He notes that the biggest show on Scripps’ Food Network,Chopped, is down 24% in adults 25-54, and that four of the five top shows on HGTV are down in the ratings. The show that’s up—Fixer Upper—recently announced that it is going off the air.
Related: Scripps Chief Lowe Could Land $91.6M Payday in Discovery Deal
Because of ratings weakness he sees Scripps’ third-quarter advertising revenue coming in at flat, compared to an earlier estimate of up 4%. For the full year, he’s lowering his ad growth forecast to 2% from 4%.
With Discovery, the subscriber losses at traditional cable and satellite operators is likely to depress future affiliate fee growth because Discovery has not been included in many of the new digitally distributed skinny bundle packages.
Nathanson increased his estimate for Discovery’s 2017 earnings per share by two cents to $2.15, but lowered his 2018 estimate by a nickel to $2.25.
“Following the July 31 deal announcement, Discovery has underperformed the S&P 500 by 16%. Given this collapse in Discovery’s equity, investors have been asking if we still think that a sell recommendation is valid here. Our answer is yes,” Nathanson said.
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