Analyst sees tepid growth for HBO, cuts Time Warner rating

Research firm Pacific Crest downgraded Time Warner (TWX) to Sector Weight from Overweight, saying that the stock is relatively expensive in light of HBO's tepid growth outlook. LUKEWARM GROWTH FORECAST: HBO should grow, "but not rapidly," wrote Pacific Crest analyst Andy Hargreaves. In order to grow outside of the pay TV ecosystem, HBO will have to make new investments which will cause its margins to drop before any growth is realized, the analyst stated. Meanwhile, Turner should benefit from increased affiliate fees in the medium term, but it will probably have to transform its programming in order to generate higher ad revenue, Hargreaves believes. Given the outlook at HBO and the stock's 40% jump off its lows, the shares look "relatively expensive," according to Hargreaves. After the success of Warner Bros' "Batman vs Superman" movie, expectations for the studio's upcoming movies based on DC Comics have increased, though successful launches of those movies are already priced into the stock, said Hargreaves. MORE BULLISH VIEW: On April 8, RBC Capital analyst Steven Cahall initiated coverage of CBS (CBS), 21st Century Fox (FOXA) and Time Warner with Outperform ratings, saying that all three companies are well-positioned in today's environment. CBS has "top notch content," while Fox's stock was undervalued and has strong international assets, the analyst wrote. Cahall was more upbeat on HBO than Hargreaves, saying that the channel's profit should be boosted by subscriber growth and overseas and Internet TV expansion. Moreover, Time Warner faces little risk from cord cutting, the analyst stated. WHAT'S NOTABLE: Hulu, which is owned by NBCUniversal (CMCSA), Fox and Disney (DIS), is developing a subscription service that would allow users to stream feeds from major broadcast and cable TV channels, the Wall Street Journal reported. PRICE ACTION: In morning trading, Time Warner rose fractionally to $75.21 per share.