Barclays downgrades Discovery; Upgrades Scripps

Barclays Capital is downgrading Discovery Communications today, February 23, and upgrading  Scripps Networks. Why? Discovery stock is up,  and Scripps Networks stock is down. That might seem like crazy logic, but in the world of stock buying, it’s all about identifying the upside and here the Scripps’ chefs beat the Discovery sharks.

Media analyst Anthony DiClemente outlines a couple of reasons for the downgrade, upgrade  in a note to investors. He points out that Discovery stock is up 9.6% and SNI is down 9.7% since Feb.9. He thinks Scripps could potentially do much better. “We recommend taking advantage of recent dislocation in the marketplace by using DISCA [Discovery] as a source of funds to buy SNI shares,” he writes. Translation: dump Discovery stock and buy Scripps with it.

DiClemente argues that Scripps Networks ratings are up big time, Food is up 14%, year-to-date, HGTV up 12%, while the Discovery networks are what he calls ‘mixed.’ Discovery Channel ratings are down 8% year-on-year while TLC is up 4%.

As the ad market picks up steam, DiClemente argues that Scripps is in a better position to take advantage, given that it is more exposed to the ad market with 61% of revenue comes from advertising, according to the Barclays estimate. At Discovery only 41% of revenue comes from advertising.

The analyst’s final point relates to affiliate fee growth. At Scripps he sees a 35% increase in fees in 2010 and an 18% growth rate in 2011. He forecasts affiliate fee growth at Discovery is up 6% this year and 5.5% in 2011.

In the wider cable world both companies are stand-out achievers, but in the world of Wall Street it’s about maintaining a better growth rate than the next guy. There’s no doubt that Discovery CEO David Zaslav will be on the phone to DiClemente today to sell him on the reasons why Discovery still has plenty of room to grow.