On Wednesday, Seaport Global Securities maintained a Buy rating on Warner Brothers Discovery (NASDAQ:WBD) with a price target of $12.00. The firm believes that the company's shares are currently undervalued due to market overreaction to industry-wide concerns.
According to Seaport, Warner Brothers Discovery has successfully restarted its content production for films and television series following recent industry strikes. The company's direct-to-consumer (DTC) segment is also experiencing subscriber growth and is in the early stages of international expansion and advertising revenue growth.
The analyst from Seaport Global Securities highlighted that while the Networks division is expected to see a 12% decline in EBITDA this year, this could improve to a 6.5% decline next year. The other two divisions are anticipated to accelerate and contribute to overall EBITDA growth for the company.
Additionally, the analyst has already factored out the NBA revenue and expense contributions from mid-2025 in a previous note.
Warner Brothers Discovery is projected to generate approximately $4.4 billion in free cash flow (FCF) this year, which should help in reducing the company's leverage. The analyst forecasts the leverage ratio to decrease to 3.8 times by the end of this year and potentially to 3.1 times by the end of 2025. The current 13.5% unlevered FCF yield and a 4.7 times EV/EBITDA multiple based on 2025 estimates suggest that the stock is trading at a low valuation, offering a margin of safety that presents an attractive risk/reward balance for investors.
In other recent news, Warner Bros. Discovery's third-quarter total company revenue has been revised to $9.98 billion, a slight increase from the previous estimate, according to Guggenheim. However, the firm slightly reduced its adjusted EBITDA forecast for the same quarter to $2.44 billion, while maintaining the full-year adjusted EBITDA estimate at $8.92 billion.
Warner Bros. Discovery has also introduced a monthly paywall for CNN's digital content, aiming to develop a new revenue stream from its online platform. In collaboration with Google (NASDAQ:GOOGL) Cloud, the company launched an AI-powered captioning solution, significantly reducing the time and cost of producing captions.
The company expanded its Board of Directors, appointing Daniel E. Sanchez, an experienced attorney specializing in tax law. Analysts from CFRA and Benchmark revised their outlook on the company, with CFRA increasing the price target to $10 and maintaining a Hold rating, while Benchmark reaffirmed a Buy rating and an $18 price target.
However, Standard & Poor's revised its outlook to "negative" due to concerns over the decline in the company's cable TV business.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Seaport Global Securities' bullish stance on Warner Brothers Discovery (NASDAQ:WBD). The company's market capitalization stands at $20.01 billion, with a price-to-book ratio of 0.58, indicating potential undervaluation in line with Seaport's assessment.
InvestingPro Tips highlight that WBD's valuation implies a strong free cash flow yield, supporting Seaport's projection of $4.4 billion in free cash flow this year. This aligns with the analyst's expectation that the company will use this cash to reduce leverage.
However, investors should note that WBD operates with a moderate level of debt, and short-term obligations exceed liquid assets. This underscores the importance of the company's efforts to improve its financial position, as outlined in Seaport's analysis.
While the company faces challenges, including a lack of profitability over the last twelve months and analysts not anticipating profitability this year, the potential for growth in the DTC segment and international expansion could drive future performance.
For investors seeking a deeper understanding of WBD's financial health and growth prospects, InvestingPro offers 7 additional tips, providing a more comprehensive analysis of the company's position in the entertainment industry.
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