On Wednesday, Citi revised its stance on Warner Music Group (NASDAQ:WMG), reducing the price target from the previous $37.00 to $31.00, while maintaining a Neutral rating on the stock. The adjustment comes in response to Warner Music's fiscal third-quarter 2024 performance, which showed revenue and adjusted operating income before depreciation and amortization (OIBDA) figures that fell short of market expectations.
The financial institution has updated its model to reflect the latest financial results and outlook for Warner Music. The company's reported revenue and adjusted OIBDA for the third fiscal quarter of 2024 were slightly below what analysts had anticipated. Consequently, Citi has made slight downward revisions to its revenue and adjusted OIBDA projections for the fiscal years 2024 through 2026.
Citi's reassessment of Warner Music's future growth potential has led to a change in the free cash flow (FCF) multiple, decreasing it from approximately 27 times to roughly 25 times. This revised multiple is a key factor in the lowered price target. Despite the adjustment in projections and valuation metrics, Citi has opted to retain the Neutral rating for Warner Music Group's shares.
The firm's analyst provided a statement regarding the revised outlook: "We are updating our model to account for F3Q24 results and our latest outlook. WMG reported F3Q24 revenue and Adj. OIBDA slightly below Street expectations. Our revenue and Adj. OIBDA estimates move down marginally from F2024-F2026, and as we factor in a more modest growth trajectory going forward, we adjust our FCF multiple from ~27x to ~25x. Our price target moves to $31 from $37. We continue to maintain our Neutral rating." The statement emphasizes the recalibration of expectations based on the recent financial data and market conditions.
In other recent news, Warner Music Group (WMG) disclosed a slight 1% rise in total revenue in its third-quarter earnings call. The company's music publishing revenue saw a more significant growth of 9%, while recorded music revenue experienced a minor decline of 1%. Despite a challenging advertising market, subscription streaming remained a strong performer, registering a robust 14% growth. WMG also announced organizational changes to streamline its recorded music business and reaffirmed its commitment to artist development and scouting new talent.
On the downside, the company anticipates a $25-30 million revenue impact in Q4 due to the roll-off from BMG digital distribution. Furthermore, Meta (NASDAQ:META)'s decision to stop offering premium music videos is expected to decrease revenue by $10 million per quarter starting in Q4. Despite these challenges, WMG remains optimistic about the streaming market and is focused on long-term growth.
InvestingPro Insights
Warner Music Group's (NASDAQ:WMG) recent performance and Citi's subsequent rating adjustment are complemented by current InvestingPro data and insights. With a market capitalization of $14.47 billion and a P/E ratio standing at 26.83, WMG is navigating through a challenging financial landscape. Notably, the company has managed to maintain a dividend yield of 2.44%, with a commendable track record of raising its dividend for four consecutive years. This is a testament to its commitment to returning value to shareholders, even amidst market fluctuations.
InvestingPro Tips highlight that Warner Music is trading at a low P/E ratio relative to near-term earnings growth, indicating potential value for investors considering the earnings outlook. Furthermore, with analysts predicting profitability for the company this year, and a confirmation of profitability over the last twelve months, the company's financial health appears to be on solid ground. However, it's worth noting that two analysts have revised their earnings estimates downwards for the upcoming period, suggesting a need for investors to stay informed on the latest analyst expectations. For a more comprehensive analysis, InvestingPro offers additional tips on Warner Music Group, which can be found at https://www.investing.com/pro/WMG.
As of the last twelve months, Warner Music has displayed a revenue growth of 7.3%, underscoring its ability to increase sales. While the company operates with a moderate level of debt, it's important for potential investors to consider that its short-term obligations exceed its liquid assets, which could impact financial flexibility. With the stock trading near its 52-week low, now may be an opportune time for investors to evaluate the company's stock for their portfolios.
For those interested in a more detailed analysis, there are six additional InvestingPro Tips available that could provide further insights into Warner Music Group's financial prospects.
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