Discovery Communications (DISCA) received a price-target reduction Tuesday from Pivotal Research Group as the firm warned clients it continues to expect “relatively weak fundamentals for video-centric media owners.”

The new price target is $26 per share, down from $28. However, this is still well above the stock’s Monday closing price of $19.06, as Pivotal kept its investment rating on the shares at buy.

In a note to clients ahead of video-centric media companies’ Q3 reports, Pivotal said “cord shaving and (to a lesser degree) cord-cutting continues to erode subscriber bases for most of these companies in the United States, constraining affiliate fee revenue growth.”

The firm noted viewing of video-based content is growing, “indicating some healthy underlying elements to the industry, although much of the growth accrues to newer [subscription video on demand] services and YouTube.” Pivotal also warned it continues to expect “a long-term, low-single digit annual decline in revenue from advertising for the sector so long as weakness among the medium’s core customers persists.”

For Discovery in particular, Pivotal said it believes investors are “too negative.” The firm said it is applying what it considers conservative assumptions for Discovery, which are for a 2% drop in annual domestic ad revenue and 3% growth in domestic affiliate fee revenue, alongside ongoing margin declines for each of the legacy Scripps and Discovery businesses.

“While there are risks to distributors dropping the networks because they lack ‘must-have’ programming such as sports, they still produce content of great interest to a broad range of consumers,” Pivotal said. It added that “even without as much pricing power as a network group with top-tier sports in the US, we think the bulk of consumers will continue to subscribe to these networks.”


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