Wells Fargo sticks to Warner Bros. Discovery sidelines in model update
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Warner Bros. Discovery (NASDAQ:WBD) isn't an expensive stock, Wells Fargo noted in a model update, but it's the media sector's most levered stock and sentiment is "fragile."
Analyst Steven Cahall recently downgraded WBD to Equal Weight, noting a "penalty box mentality."
The company's challenges weren't fully revealed until the second-quarter earnings call, where the company reduced guidance for earnings before interest, taxes, depreciation and amortization by about $2B, he noted.
That call was "supposed to be the big kitchen sink event, with a new valuation anchor point putting a floor on the stock. So, what gives with the continued underperformance in what are seemingly some of the best set of assets in Media?" Cahall asks.
He thinks there's a lack of conviction in guidance for at least $12B in 2023 EBITDA, with concerns including "gross leverage at 5.4x, cord cutting, macro, and (direct-to-consumer) risks."
He now estimates 2023 EBITDA at $11.8B, factoring in $2.6B in synergies and "stable" linear earnings, and expects free cash flow at $5.6B, with $300M in costs to achieve that. The biggest opportunity to drive run-rate synergies come in selling, general and administrative costs, he noted.
"Media names are getting more complex with the pivot from linear to streaming," Cahall said. "Amidst this, leverage has gone up making names like WBD more about catalysts and execution than simply about valuation."
So despite the cautious outlook, Wells Fargo values the stock at 8x EBITDA and notes it is inexpensive compared to Netflix on an enterprise value-to-subscribers measure; that results in a $19 price target, implying 51% upside.
In recent news about the company's transformation, reports about a revamp of cable strategies means HBO drama reruns could head to its TBS and TNT networks.