Investors bless new AT&T with gains, as pressure arrives for Warner Bros. Discovery
AT&T (NYSE:T) and Warner Bros. Discovery (NASDAQ:WBD) each traded higher early this morning in their new post-spin-off lives, with investors of each reacting positively to the new arrangement, against a broadly lower market in technology and media. But after an initial bump, selling pressure is showing up for WBD.
On a post-spin valuation basis, AT&T (T) is up 6.8% today, hitting $19.47; it's retesting resistance at its 200-day moving average. Warner Bros. Discovery (WBD) - of which AT&T shareholders own 71% - rose as high as 8%, but in recent minutes has fallen 1.8% to $24.04. AT&T and Discovery completed their $43 billion transaction late Friday.
Analysts looking at the new Warner Bros. Discovery have coalesced around a $40 price target, implying a hefty 66% upside. Deutsche Bank has made the new stock its top pick in Media, saying it's one of the best positioned companies in global streaming.
"From a content perspective, we view WBD as No. 1 in scripted general entertainment content given the Warner Brothers + HBO libraries and current production slates; and No. 1 in unscripted given legacy Discovery's content across its lifestyle brand portfolio," analyst Bryan Kraft says.
He's also got praise for recently turbulent news network CNN (a "valuable and differentiating asset for WBD's global streaming business") as well as a boost from sports rights in the key markets of the U.S. and Latin America.
He's expecting WBD can roughly double today's global streaming subscriber base to 194 million by the end of 2026 (with potential upside to the forecast considering Netflix is already at 222 million), and drawing $24 billion in revenue across its various service tiers (subscription video, ad-supported video and free ad-supported TV).
Evercore has boosted its former In-line rating on Discovery to an Outperform on WBD - the "first direct-to-consumer free cash flow machine."
Shares in the new No. 2 media company (behind Disney) are undervalued given a 14% 2023 levered free cash flow yield, and a path to grow free cash flow per share at double digits beyond 2023, analyst Vijay Jayant says. The combination of HBO Max and Discovery+ into a single service will be "highly synergistic," Jayant says; HBO Max will bring "expensive, flashy" originals needed to acquire customers, while Discovery's giant library will offer retention of those customers.
Streaming revenues should grow at a 21% compound annual rate from 2021-2026, in line with expectations for Disney, Jayant says, while a consolidated product in Q1 2023 will launch a reacceleration.
Long-term fundamental investors should take advantage of a "technical aberration" given the Reverse Morris Trust structure of the deal has created a massive supply of stock, Jayant thinks.
Atlantic Equities also boosted WBD to Overweight with a $40 target. MoffettNathanson, for its part, has departed from the bullishness, starting the company at Neutral with a $27 price target.
As for AT&T, overall an average price target of $21.90 implies 13% upside from here. BofA adjusted its price target to $25 while reiterating a Buy, suggesting that some complexity concerns have resolved and the new dividend is baked into expectations.
That's been one subject of heavy concern for AT&T investors: where the new dividend yield would fall. With an expected annual payout of $1.11, it's currently sitting at 5.7% on a forward yield basis (thanks to today's post-spin gain). AT&T will trade ex-dividend this Wednesday, April 13.
AT&T now looks an awful lot like Verizon, J.P. Morgan's Philip Cusick says - with a similar dividend yield but still a lower EBITDA multiple. Dividend yield even at the firm's $22 price target would be 5.0% vs. Verizon's 4.8% - and the enterprise value-to-EBITDA multiple there would be 6.6x, vs. Verizon's 7.4x today.
Deutsche Bank's Kraft also updated his price target on AT&T, cutting to $24 from $30 - essentially an unchanged valuation for "stand-alone" AT&T. He's positive on AT&T following the transaction as well as commentary from AT&T's recent analyst day and a view that the wireless market saw "healthy volumes" industrywide in Q1.