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07 Jul, Thursday
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Bull Trader USA

The Ratings Game: Discovery stock surges toward best day since 2008 as Bank of America cheers ‘extremely favorable’ profile

Shares of Discovery Inc. rocketed Friday, and were on track for their best day in more than 13 years, after a Bank of America analyst chimed in with an upbeat view of the company’s prospects in streaming ahead of its deal close with AT&T Inc.’s WarnerMedia unit that’s expected to come later in the year.

Bank of America’s Jessica Reif Ehrlich upgraded Discovery’s stock DISCA to buy from neutral Friday, arguing that, once combined with WarnerMedia, Discovery “has the potential to be the most dynamic global media company.”

Shares of Discovery were up 17.2% in Friday morning trading and on pace to log their largest single-day percentage gain since Oct. 13, 2008, when they rose 17.4%.

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The streaming field has become increasingly competitive, but Reif Ehrlich expects that a combined Warner Media-Discovery will have the “breadth” to thrive—especially if the company moves to offer a single streaming service that merges WarnerMedia’s strong film and television programming with Discovery’s distinctive lifestyle and reality content.

“We believe consumers will coalesce around a few streaming platforms longer term and depth, breadth, quality of content and scale will be the key determinants of the winners and losers,” she wrote. “This backdrop provides the strategic rationale behind the merger of these two complimentary media assets, which now have the size and scale, and ability to be more nimble outside of AT&T’s T ownership, to compete effectively on a global basis.”

Discovery admittedly faces risks as its management team will have to unite two large companies, navigate the push to streaming, and contend with challenges in the world of linear television, but Reif Ehrlich thinks that the combined company’s scale, along with Discovery management’s strong track record on acquisitions, will provide an advantage.

Discovery’s stock boasts an “extremely favorable” risk/reward profile, she added, leaving aside the “near-term technical overhang related to the merger.” Reif Ehrlich boosted her price objective to $45 from $34. The shares closed Thursday at $25.72 and recently changed hands at $30.10 in Friday’s session.

The company also disclosed in a Friday morning filing that Brahman Capital Corp. has amassed a 5.26% stake in the company. Brahman Capital’s prior stake was 1.76%, according to data from FactSet.

Reif Ehrlich isn’t the only analyst to cheer Discovery’s prospects recently. Wells Fargo’s Steven Cahall dubbed the stock his “top large-cap value idea” for the year in a Tuesday note to clients.

Discovery “needs to be on everyone’s radar for 2022,” he wrote at the time, as “HBO and Warner Bros. are bona fide hit factories” and the combined asset mix looks appealing for the streaming era.

Shares are up about 13% over the past three months but off just as much on a 12-month basis. The S&P 500 SPX has risen roughly 6% in the past three months and 23% in the past 12.

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