Pivotal Predicts Government Policies Will Continue to Recognize Value of Free TV

Upgrades CBS target price and says fears of losing young TV viewers to other devices is overrated

By John Eggerton -- Broadcasting & Cable, 9/4/2012 9:41:37 AM

Pivotal Research Group has initiated coverage of cable programmers Viacom and Discovery, saying the former stock is undervalued while the latter is about right. The financial adviser also upgraded its target price for CBS stock, suggesting the government will continue to value over-the-air service.

Pivotal senior research analyst Brian Wieser gives Viacom a big "buy" rating, giving its stock a per-share target price in 2013 of $73, a whopping 46% above last week's close.

He says the market's focus on short-term metrics has "beaten" down the stock price, and that Pivotal's research suggests that the fears of young viewers being siphoned from the Nickelodeon TV channel to online content have been overstated. "Our analysis of relevant data confirms for us that kids' viewing is not meaningfully impacted by consumption of TV content on alternative viewing devices," he says.

As for Discovery, Pivotal initiates coverage with a "hold" rating, targeting its stock at $58 in 2013, 6% above its last-week close.

In a related announcement, Pivotal said it was raising its 2013 target price for CBS shares from $39 to $43, citing strong underlying assets, margin improvement and cast-flow generation. In addition, cites public policies "supporting the company's broadcast businesses."

While broadcasters often feel that federal regulators are treating them as redheaded stepchildren, Pivotal sees a bright future.

"If retransmission consent rules were to be found unconstitutional or if new technologies emerged to threaten broadcasters' abilities to generate revenues from these rules, we believe that new rules would eventually emerge to better enable local broadcast licensees to generate revenues in other ways," said the Pivotal report. "[Because] broadcasters are critical providers of local news and information in their communities, we believe that policy-makers would not allow local broadcasters to suffer the same fate newspapers are facing, especially if they continue to provide public goods that are enjoyed on a sufficiently wide basis."