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Warner Bros. Discovery Inc. shares were basking in the love of two new bulls Friday as analysts at Wolfe Research and Wells Fargo changed their tune on the media giant.
“After a ’22 rife with negative surprises around the Warner-Discovery integration & TV advertising market, and after two rounds of forecast reductions, today’s expectations are attractive to underwrite,” Wolfe’s Peter Supino wrote as he upgraded the name to outperform from peer perform. “Networks segment estimates & valuation bake in cyclical & secular headwinds, and we believe that the skeletons in Warner’s closet have been accounted for.”
Supino said that investors seem too pessimistic about the company’s networks business, with WBD’s stock price
WBD,
currently in a “draconian pay-TV scenario.”
“We’re bearish on the linear pay-TV outlook, but the Networks generate lots of cash and will for many years,” he wrote. “WBD’s scale, licensing strategy, & HBO/Turner synergies provide some cushion. Net-net, less extreme, but still very bearish decline assumptions drive stock upside.”
He anticipates that Warner executives will be able to drive gross leverage down from his estimate of 3.9x at the end of 2023 to 3.0x by the end of 2024.
Warner shares were up more than 4% in Friday’s premarket action.
Wells Fargo’s Steven Cahall discussed leverage expectations as well in his own upgrade of WBD shares to overweight from equal weight. Both analysts noted that WBD’s management has linked executive compensation to progress on deleveraging.
“We threw everything and the kitchen sink at a Downside Case scenario for WBD, and it still delevers to 3x by ’25E,” Cahall wrote. “We now have conviction in [free-cash flow] to limit downside, while the stock has asymmetric upside.”
Cahall acknowledged that “recent macro events might make levered equities seem worse,” but he feels more optimistic about WBD’s positioning lately due to the company’s execution and potential for synergies. WBD was formed by the merger of Discovery and WarnerMedia after AT&T spun off the latter last spring.
There’s more to the story than just deleveraging, he added: “We think DTC [direct-to-consumer]/HBO is currently undervalued vs peers given the near-term break-even and future profit ramp.”
Both analysts now have $20 price targets on the stock. Supino didn’t have a price target on the stock previously, while Cahall assigned it a $13 target prior.
