On Friday, Wolfe Research began coverage of Universal Music Group NV (AS:UMG:NA) (OTC: UMGNF) stock, issuing a Peer Perform rating. The firm has set a fair value range for the stock between €22 and €34 per share, but did not provide a specific price target, which is consistent with its Peer Perform ratings.
Universal Music Group, a prominent player in the music industry, holds rights to approximately one-third of the world's music repertoire. The company's substantial catalog makes it an essential partner for music distributors, who rely heavily on its content and pay royalties accordingly.
Wolfe Research highlighted UMG's ability to benefit from the estimated 11% five-year growth in music streaming revenues applicable to labels and an 8% growth in the overall music industry.
Despite the positive outlook for industry growth, Wolfe Research cautions that the medium-term forecasts for Universal Music Group's EBITDA and free cash flow appear to be optimistic. This outlook takes into consideration the increasing marginal costs and the necessary capital investments required to maintain the company's market share.
Nevertheless, the firm acknowledges that Universal Music Group is positioned to see a favorable shift towards digital distribution and anticipates €250 million in cost savings. These factors are expected to contribute to a 360 basis point margin expansion by the end of fiscal year 2028, with an estimated 11% compound annual growth rate in EBITDA.
However, Wolfe Research also notes that the company's margins may be restrained due to artists gaining more negotiating power and a higher proportion of mid-tier artists using lower-margin distribution services.
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