Raymond James starts bullish on Disney, WBD with cash flow growth ahead
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Raymond James has opened coverage on big media, saying there's room for optimism around "compelling" cash flow growth despite several quarters of negative sentiment.
The firm started Walt Disney (NYSE:DIS) and Warner Bros. Discovery (NASDAQ:WBD) at Outperform, while taking a more Neutral stance on rival Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA).
"The traditional media sector is in a transition period from the very profitable but secularly declining linear business to the more difficult and competitive but secularly growing streaming business, further impacted by COVID-19âs impact on movie theater attendance, a cyclical advertising downturn, broader macroeconomic concerns, plus both a writersâ and actorsâ strike," analyst Ric Prentiss said.
"However, we think the industry has pulled a number of levers to drive cash flows, including streaming price increases, content spending discipline, film windowing, and adding advertising tiers, and we believe the industry is primed to ramp cash flows in the coming years."
In Disney's (DIS) case, the company has assets to help navigate the linear-to-streaming transition, Prentiss said: "With two scaled U.S. streaming services in Disney+ (46M domestic subs) and Hulu (48M), as well as ESPN+, Disney is bundling its services, driving higher Average Revenue Per Account, lower churn, and strong pricing power."
Disney (DIS) also has the strongest portfolio of intellectual property in media, which drives all the company's business units, including studios, linear TV, streaming, and the "very large and cash-generating" parks/experiences group, "which may be the beating heart of the company."
Prentiss has a 12-month price target for Disney (DIS) of $97, implying 13% upside.
As for Warner Bros. Discovery (WBD), the merger of WarnerMedia and Discovery has built two complementary streaming services as well as "significant" synergies, Prentiss said. And like Disney, WBD has a "Tier one" portfolio of IP that will bring strong returns on content investment and serve as the backbone of its segments (studios, networks and direct-to-consumer).
WBD has key concerns, namely leverage and significant exposure to linear TV -- but a "strong runway" of free cash flow growth, and Prentiss has an end-2024 price target of $19, implying 62% upside.
The firm started Paramount Global (PARA) (PARAA) at Market Perform, noting a heavy exposure to linear TV and a "long and winding road" to profitability in streaming, with content at a competitive disadvantage to peers.

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Compare metrics for DIS to PARA, PARAA, WBD