Warner Bros Discovery (WBD) Undervalued ?

WBD

Warner Bros Discovery is a media-entertainment giant that has hit rough times lately, debt is concerning and they have not been profitable as of their last earnings report, but the company has some interesting numbers as of lately that could show it being severely undervalued. ( All sources for the information on the DD will be provided at the end of the post).

Streaming and Box Office

This year has been great for WBD in this area, movies like The Batman or Elvis have crushed the Box office and have posted great profits for WBD. In the case of Batman the budget was of 200 million and box office 770.8 million and in regards to Elvis budget was 85 million and box office gave 281.4 million. Special mentions to Fantastics beasts budget: 200 million box office: 405.2 million.

In regards with the streaming services of HBO MAX and Discovery+, how will they manage to merge them successfully is still unknown but separately they have posted great numbers, they ended 2021 with 73.8 million users and as of their last earnings call that number has grown to 92.1 million subscribers after adjusting for 10 million AT&T mobility subscribers. This has been shown on their quarter over quarter sales of 220%. This growth is much faster than any of the other companies in the industry (NFLX: 8.60%, DIS: 23.3%, PARA: 18.5%. Source: Finviz).

On the negative side WBD has had to scrap projects that didn't have good outlook like batgirl. This happened because they have to be picky when deciding what should go through because of their debt levels and protect their new DC movies that started successfully with Joker(2019) and The Batman (2022).

WBD Gaming

WBD has had a great hit with its latest release Multi-Versus. The game has raked up over 20 million players as of August 22, this can represent a massive cash cow since it is a free to play game which might bring more and more people as it keeps getting popular. This can generate huge gains via merchandise and in game cosmetics.

The gaming division is also scheduled to release Hogwarts legacy on the 10th of February of 2023, this shows a growing outlook and if the games are successful WBD might expand onto the growing market of gaming with some of their most knowledgeable franchises. This division of WBD has overall grown 4% in revenue against the previous quarter with the release of Lego Star Wars-Skywalker Saga.

WBD Networks

This division for WBD has grown 1% on their last quarter, and advertising revenues 2%. This growth has been explained because of strong sports and audience ratings. This sector is expected to slow growing due to the rise of the internet and unless they manage to get those services in there in some profitable way this sector of WBD might have some trouble, Zaslav seems to have a plan for this according to some interviews .

Debt

The largest issue for WBD is their debt, WBD has pushed the lever up to concerning points. Their debt to equity ratio is 1.02, this means that they have more debt than equity which is concerning, specially when going into a macro environment with higher interest rates which means WBD is not going to be able to refinance. The positive side is that when looking at their debt schedule is that their average maturity is 14 years which shows there is time to pay off debt and the interest they have to pay for this debt is mostly under 6% and for their larger bonds is less than 5%.

Zaslav has urged how important it is to reduce their debt levels and they have managed to reduce some of this debt during the latest quarters.

Ratios and comparison with competitors.

When comparing with their main competitors WBD seems to be growing faster and their valuation is much more conservative than Disney or Netflix for example. WBD forward p/e is of 11.45 which is a good ratio, their P/B ratio is of 0.58 which means that if you take WBD and sell it by parts you are getting more than what you are getting by market cap. Their P/S ratio is better than any of their competitors with the exception of paramount and in regards of their price/free cashflow WBD`s is much better than the rest of the giants of the industry. The company that seems to be comparably undervalued by ratios on the sector is Paramount($PARA)

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Other information that could indicate that WBD is undervalued

The 5x cable tv industry ebitda multiplier combined with Q2s $2,282M(9.1B annualized) cable tv adjusted ebitda leads to a valuation $45.5B. This pretty mich equals what I expect the companies debt to be at the end of this year.

You’re left with a market cap of $30B for the Streaming service, the back catalog, the studios, gaming, and the IP that can be used for future projects.

A few days ago, Comcast said Hulu with 2/3 of the subs at a similar arpu that hbo max had was worth $50B or so. In 2015, hbo was making 1.81B/ year. That’s worth 30 billion by itself with a 15x multiplier. Hbo has 3x as many subs now.

In the merger docs, the back catalog was estimated to be worth $22B based on revenues from other streamers.

There’s a ton of value in this company. Management projects that 2024 ebitda will be 14B with 9B FCF. 2023 will be 12B ebitda and 4-6B FCF. At 30B of market cap, that’s 3.3-5x FCF for a growing business. From: u/tiger5tiger5

this could mean that WBD can sustain their streaming service with their cable services until the streaming service gets profitable, which it will soon at this growth rate

What are insiders doing?

Insiders have been consistently buying WBD which may hint at the company being undervalued, they have specially bought after the last dip after their earnings report. (Source: Open BB terminal, sub doesn't allow pictures)

Conclusion

If WBD manages to get their debt under control, their streaming servicies continue to grow at the same pace and the WBD gaming section is a success I see this company going long past the target price of 24.74$ per share, specially because the management has added compensation if the stock goes to certain levels in the next few years. I already own WBD and have traded it a lot during the last few months, but at current prices I see it being a really good long term play for the next years

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Sources :

Q2 earnings release : https://s201.q4cdn.com/336605034/files/doc_financials/2022/q2/WBD-2Q22-Earnings-Release-Final.pdf

Q2 Earnings presentation : https://s201.q4cdn.com/336605034/files/doc_presentations/WBD-2Q22-Earnings-Presentation-Final.pdf

Debt Schedule: https://s201.q4cdn.com/336605034/files/doc_financials/2022/q2/WBD-Outstanding-Debt-as-of-June-30-2022.pdf

WBD Finviz: https://finviz.com/quote.ashx?t=WBD&ty=c&ta=1&p=d

PARA Finviz: https://finviz.com/quote.ashx?t=PARA&ty=c&ta=1&p=d