On Thursday, Universal Music Group NV (AS:UMG:NA) (OTC: UMGNF) experienced a shift in stock rating as CFRA moved its recommendation from "Buy" to "Hold," maintaining a price target of €30.00. The firm's decision is grounded in a valuation assessment, suggesting limited potential for stock price increase towards their target.
The downgrade comes despite CFRA's expectation that Universal Music Group can achieve an annual revenue growth of 6%-8%, assuming the economy does not enter a recession. The firm's earnings per share (EPS) estimates remain unchanged at €1.02 for 2024 and €1.12 for 2025, aligning with consensus estimates.
CFRA's target price is based on a forward Total Enterprise Value (TEV) to EBITDA multiple of 20.9 times the firm's 2024 EBITDA forecast. This multiple represents a premium over the three-year historical average of 19.4 times, justified by Universal Music Group's revenue opportunities across various products and geographies.
However, CFRA points to several business risks that could potentially challenge Universal Music Group's current business model, which relies on distributing contracted artist music through music streaming platforms. These risks include disruptive industry trends, governmental and regulatory issues, geopolitical instability, cybersecurity threats, and the need to protect content from piracy.
The company's financial position is also noted, with nearly €2.05 billion in total debt and €504 million in cash and cash equivalents. Universal Music Group is actively looking at mergers and acquisitions as a strategy for achieving higher growth and expanding capabilities.
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