Wells Fargo downgraded Warner Bros. Discovery and cut its price target on the company’s stock, warning of a weaker earnings outlook for 2024 and 2025.
“Lower earnings have been the story since the merger, and the trend limits future multiple expansion,” analyst Steve Cahall wrote in a Monday note to clients lowering the firm’s rating from overweight to equal weight and cutting its price target from $16 to $12 per share.
The bank estimates that adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will be below $10 billion in 2024 and reach $10. 4 billion in 2025, down 5% and 7%, respectively, from its previous guidance of $10. 5 billion and 11. 2%. . Million.
“We now recognize that linearity is a bigger-than-expected headwind for the WBD multiple, deleveraging has not been as strong with falling earnings expectations,” he added. “Even though HBO’s content remains strong, Max’s runtime doesn’t lead to a turnaround in profits. “
Cahall also cited a “less favorable” situation for mergers and acquisitions.
While the firm has previously pushed the prospect of Comcast buying WBD, Cahall pointed out that the NBCUniversal parent’s CEO Brian Roberts recently talked the idea down. He also noted that even if the deal makes sense, there isn’t any urgency in an election year.
“PARA, or some of its assets like CBS, are or could be available, but equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” Cahall added. “This means WBD’s opportunities are primarily organic. We do forecast a much stronger HBO slate in ’24, but also [continued] Networks pressures.”
In addition, he warned that WBD’s recent experiment of licensing HBO and Warner Bros. to like Netflix is a “double-edged sword. “
“One way to [accelerate] EBITDA and [free money flow] would be to let big-name titles like The Sopranos, Game of Thrones, or Friends pass to Max streamers with a lot of money, probably billions in untapped potential [revenue]. “Cahall says, “But this would come at the expense of maximum participation (we estimate ~27 min/day). The direction is stuck between DTC expansion and deleveraging through licensing deals.
Looking ahead, Wells Fargo no longer sees “a significant improvement in consensus estimates” or a “positive catalyst adding mergers and acquisitions that could drive expansion in 2024. “
“In this context, we see more and more horny benefits and/or revaluation stories in the media,” Cahall concluded. “WBD still has some of the most productive assets in the sector and an undemanding valuation, but we deserve to stop downward revisions and “Or DTC strategy deserves to give in to create significant upside potential. ”
WBD shares fell 2. 4% in Monday’s trading consultation and are down 11% year-to-date and 27. 9% over the previous year.