Pure-play cable names Discovery, Scripps face more trouble ahead, analyst says

Discovery (DISCA) and Scripps Networks (SNI) dipped sharply in early trading after MoffettNathanson downgraded the stocks to sell, arguing in a far-reaching note that as the TV and media industry comes to grips with changing viewership habits, those companies most reliant on cable networks will increasingly fall out of favor. ANALYST SAYS MEDIA CHALLENGES HERE TO STAY: Updating his fundamental outlook on the media sector, MoffettNathanson analyst Michael Nathanson argued Tuesday that, despite media names trading at their lowest relative levels since 2008, he does not expect an industry-wide rebound. Instead, shifting consumer trends toward skinny bundles, live content, and on-demand viewing will begin rewarding individual companies based on the quality of their content. Pure-play cable network names such as Viacom (VIA), AMC Networks (AMCX), Scripps and Discovery will remain "challenged," while companies with strong representation in sports, news, and other live content such as Disney (DIS), Fox (FOX) and Time Warner (TWX) "will be rewarded" with growing affiliate fees and ad dollars. Net-net, owners of unessential and non-live content are at "significant" risk, the analyst says: "Either you are live and large... or dead." Taking an even more secular perspective, Nathanson asks whether "all this declining consumption" could presage the death of TV advertising, concluding that "elements" of the broadcast industry will face similar levels of pressure as the newspaper industry. The analyst downgrades Discovery and Scripps to Sell while cutting their respective price targets to $21 and $52; reiterates his Buy rating on Disney, Fox and Time Warner; and stays Neutral on AMC, CBS (CBS) and Viacom. PRICE ACTION: Shares of both Discovery and Scripps opened sharply lower Tuesday before recovering to be roughly unchanged on the day, while Class A shares of Fox and Time Warner are up 1.5% and 2%, respectively.