Stock Analysis: Warner Bros Discovery

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Warner Bros. Discovery (ticker: WBD) is a leading global media and entertainment company that creates and distributes a portfolio of content and brands across television, film and streaming. It competes with more prominent on-demand brands like Netflix and Disney+.

WBD is a recent spin-off from the merger between AT&T Warner Media and Discovery.

Available in more than 220 countries and territories, Warner Bros. Discovery owns iconic brands and products, including Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.

POSITIVE DRIVERS

1)Broad Offering: Warner Bros discovery has one of the most extensive video content libraries. 200k + hours. High-quality production capabilities through Warner Brothers film studios and premium sports rights in the USA, Europe and Latin America. A pure-play media company with diversified revenues and very compelling franchises and brand portfolios.

2)Secular Trend: Warner Bros discovery is well-positioned to benefit from the current changes in consumer behaviour regarding video content consumption. Secular up-trends in the video streaming industry combined with the decline of linear TV offer significant growth potential for the company.

3)Stable Revenue: WBD is a profitable company with stable revenues and solid free cash flow.

Chart #01 — revenue / ebit

4)Cash position: Consistent free cash flow and a good ratio to net income show quality of earnings. As shown in chart #03, the company's cash has increased in the past years while the short term debt has decreased, which is a sign of good financial health.

Chart #02 — free cash flow / net income
Chart #03 — cash vs short term debt

5)Solid balance sheet: Excellent ratio of liabilities to assets shows financial strength.

Chart #04 — assetts / liabilities

6)Shares Diminishing: The company is buying back shares, increasing the relative value of the shareholders' stake.

Chart #05 — shares outstanding

7)Current Valuation: Price to sales under one and EVtoEbit of 13 tell that the company valuation is currently very interesting.

Chart #06 — EVtoEbit / PS

RISKS

1)Reducing profitability: In the past two years, WBD margins contracted. The pandemic and the inflationary conditions could be causing the contraction. Ebit margins remain at an acceptable level, above 10%.

However, the diminishing margins could signify more serious issues in business management.

Chart #07 — margins

2)Low investment returns: Return on capital employed and return on equity are low and are not trending up. It could signify a lack of solidity in the underline business.

Chart #07 — ROCE/ROE

3)Competition and inflationary conditions: Significant risk to the downside in the current macro scenario. The inflationary environment can significantly damage the streaming business. Moreover, revenues and profitability could be significantly impacted in a recession.

OPPORTUNITY COST

When considering an investment, one must compare it to alternatives to weigh up the opportunity cost. At present, 10-year treasuries are yielding around 2.8%.

My projected annual yield for WBD is around 8%. The free-cash-flow discounted intrinsic value sits at $34, indicating that WBD could be currently undervalued.

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Disclaimer: The author might or might not hold ownership in the company mentioned when writing this article. I do not provide personal investment advice, and I am not a qualified licensed investment advisor. I am an amateur, independent investor. All the information is for entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies.