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Lazard Upgrades Disney, Discovery Communications to ‘Buy’

In separate research notes on Friday, Lazard Capital Markets turned more bullish on two media companies when it upgradedDiscovery Communications and Walt Disney to “buy” ratings.

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Cinderella's Castle

Lazard upped its rating on Disney to “buy” from “neutral,” and placed a $53 price target on the company’s shares.

“Because of ESPN’s dominant position in sports and Disney’s momentum in kids’ content, we see less reason to worry about ratings issues than conglomerate peers, making Disney a cleaner call on the secular positive of program fee growth,” the report said.

Several of the company’s peers, including Viacom, News Corp., and Time Warner, have experienced ratings volatility. In contrast, the audience from Disney’s ESPN branded-networks has been fairly steady year-to-year. The report added that “sports content also has the virtue of being largely DVR-proof and less subject to Internet disintermediation.”

Analysts added the company’s untapped cash capacity was larger than at its peers and could be used to boost earnings through either share repurchases or acquisitions. The company’s cash capacity consists of free cash plus borrowing capacity and excess cash over the next three years.

Risks for Disney include advertising slowdowns, sports rights costs, and movie/TV flops, such as the company’s recently released “John Carter” film.

Meanwhile, Lazard placed a 12-month $63 price target on Discovery Communications and upgraded it to “buy” from “neutral,” due to a forecasted continuation of multiyear, above-peer growth for the media company.

Lazard analysts predict Discovery has the capacity to buy back shares equal to 36 percent of its market cap .

“This capacity is the highest among Discovery’s peers, and suggests to us upside surprise potential,” analysts said.

Other drivers that Lazard sees for growth at Discovery include domestic momentum at its Discovery ID (Investigation Discovery) network, global expansion at key networks, a new renewal cycle with distributors set to begin in 2013, and firming domestic ratings at Discovery Network.

For the first quarter, Lazard estimates Discovery will post earnings of 61 cents a share on revenue of $1.06 billion. This is up from its previous estimate of 59 cents per share on $1.046 billion in revenue.

Additional News: Disney Writes Down ‘John Carter’ Bomb

Additional Views: Disney Is a ‘Buy’: Analyst

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Disclosures:

Lazard Capital Markets makes a market in Disney and Discovery Communications securities.

Disclaimer

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Follow Katie Little on Twitter @katie_little.