Warner Bros. Discovery stock, hammered since the media giant was forged in the merger of Discovery and WarnerMedia, is up 28% in the last five days and analysts are starting to see an upside following billions of dollars worth of charges against earnings for restructuring and programming write-offs.
On Tuesday, Warner Bros. Discovery shares closed at $12.56, up more than 8% from the prior day. The rise was powered by positive analyst reports from Goldman Sachs and Bank of America.
When it reports its fourth-quarter earnings, Warner Bros. Discovery will be taking changes against earnings of $4.1 billion to $5.3 billion, capping a year in which CEO David Zaslav undid many of the strategic decisions made by WarnerMedia management and noted that the company was in worse financial shape than WarnerMedia’s projections suggested.
Wall Street thinks the company has cleared the decks and is headed in a new direction.
“We believe 4Q is an opportunity for management to turn the page to 2023 and reset the narrative,” BofA Securities senior media and entertainment analyst Jessica Reif Ehrlich said in a research note that rates WBD stock as a buy and as part of the brokerage’s US 1 list. She sees the stock rising to $21 a share.
“At this point, the majority of heavy lifting (related to restructuring charges etc.) has been completed; direct-to-consumer (DTC) losses peaked in ’22, with a path to breakeven in ’24; and the cyclical headwinds should abate as macro conditions improve,” Reif Ehrlich said.
“It already appears January advertising trends have improved sequentially (albeit off a modest base) from December,” she said. “Levels and comps would ease as the year progresses. In addition, WBD has renewed over 30% of affiliate deals at attractive pricing terms, which should help mitigate the secular challenges related to cord-cutting. This, coupled with the spring launch of a new combined DTC service, a more robust film slate, incremental synergies and de-risked consensus forecasts makes WBD’s risk/reward highly attractive at current levels.”
Reif Ehrlich is lowering her forecast for Q4 revenue to $11.14 billion, but increasing her forecast for Q4 EBITDA. For 2023, she expects WBD to generate revenue of $43.3 billion and EBITDA of $11.3 billion.
Goldman Sachs analyst Brett Feldman included Warner Bros. Discovery stock in his top picks for 2023.
“While WBD confronts many of the challenges facing traditional media companies (cord-cutting, macro pressure on advertising, intense streaming competition), the stock trades at 6.5 times 2023 estimated enterprise value/EBITDA, which is at the low end of comps (6.5-15 times),“ said Feldman, whose target price for WBD shares is $19. “However, we estimate that WBD is best positioned to drive EBITDA growth, ramp free cash flow and de-lever its balance sheet in 2023 as it pursues $3.5 billion of merger synergies and relaunches its flagship streaming service.”
The enthusiastic analyst reports follow an appearance a week ago by WBD chief financial officer Gunnar Wiedenfels at the Citi Communications, Media & Entertainment Conference for investors.
At the conference, Wiedenfels said the debt-laden company was finished reducing staff and removing content from HBO Max in order to save money by reducing royalties and taking tax write-offs.
“That was very important to all of us, to really use 2022 to leave the purchase accounting behind us, leave those initial strategy changes behind us, get it all out there in terms of our restructuring estimates and then be able to turn the page forward,” he said. “I think the team has laid a great foundation and I’m really excited about the growth from here.”
Feldman said his favorite cable stock is Charter Communications, with a 12-month price target set at $422 a share.
“Cable stocks were significant underperformers in 2022 as they faced increased competition from fiber and fixed wireless that drove material declines in broadband net adds,” Feldman said.
“We believe the setup for Charter is more attractive heading into 2023 based on three key factors. 1) We expect Charter’s broadband net adds to show improvement throughout 2023 driven by its rural footprint expansion, network upgrades, and moderating levels of fixed wireless net adds. 2) Following Charter’s analyst meeting in December 2022, we believe investors’ expectations have been reset for capex, FCF and buybacks. 3) Valuation looks attractive, with Charter trading at 7.3x 2023E EBITDA vs. 6.5-7x for most telecom and cable comps vs. our outlook for materially faster EBITDA and FCF/share growth.” ■
