Sun. Feb 5th, 2023

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Quite a lot of ink has been spilled about how greater rates of interest ought to crush extremely levered development corporations. In actuality, the S&P 500’s weighted-average price of capital is certainly greater from a 12 months in the past, but it surely stays very low by historic averages.

Certain, a two-percentage-point year-on-year climb is huge, however the WACC was by no means 0% as so many pundits prefer to toss round. It bottomed out close to 4% a 12 months in the past.

One firm with a big debt burden took the higher-rate setting on the chin for a lot of this 12 months, however there may be music to my ears when weighing the valuation and technicals.

Borrowing Prices Rise

Goldman Sachs Funding Analysis

In line with Financial institution of America World Analysis, Warner Music Group (NASDAQ:WMG) is a number one music leisure firm and proprietor of main report labels, together with Atlantic Data, Warner Data, Elektra Data, and Parlophone Data. The corporate’s Recorded Music enterprise is dwelling to most of the world’s hottest and influential recording artists. Warner Chappell Music, WMG’s music publishing enterprise, represents works by over 80,000 songwriters and composers with a set of greater than 1.4 million music compositions.

The New York-based $16.8 billion market cap Leisure business firm inside the Communication Providers sector trades at a excessive 30.7 trailing 12-month GAAP price-to-earnings ratio and pays a market-level 2.0% dividend yield, based on The Wall Avenue Journal.

Just lately, Warner produced a powerful This autumn earnings beat, based on Searching for Alpha, and shares jumped 14% whereas reporting double-digit development in margins. Following the better-than-expected quarterly outcomes, BofA upgraded the inventory, main to a different soar within the share worth. Whereas streaming-related corporations are struggling amid so many platforms out there through the direct-to-consumer technique, this music producer seems to see few dings to development.

Draw back dangers embrace FX headwinds (although a decrease U.S. greenback from a number of weeks in the past is a boon), subscription renewal challenges, and ongoing tensions in Ukraine. Extra importantly, WGM may lose market share to larger gamers like Sony and Common.

On valuation, analysts at BofA see earnings falling barely subsequent 12 months after a stellar 2022. Per-share earnings are then anticipated to rise at a stable clip in 2024 and 2025. The Bloomberg consensus forecast is just not fairly as optimistic as BofA’s outlook, but it surely too exhibits a return to development after subsequent 12 months. Dividends, in the meantime, ought to proceed to extend.

Nonetheless, each the working and GAAP P/Es look to stay excessive within the coming quarters and the EV/EBITDA a number of, which is essential for a lot of media & leisure corporations, is just not a screaming purchase. The upshot is WMG is free money stream optimistic. With a ahead PEG ratio of simply 1.21, based on Searching for Alpha, I believe the excessive P/E is okay given the expansion outlook.

Warner Music: Earnings, Valuation, Dividend Forecasts

BofA World Analysis

Trying forward, company occasion information supplied by Wall Avenue Horizon present an unconfirmed Q1 2023 earnings date of Tuesday, February 7 BMO. Earlier than that, there’s a dividend fee date on the primary of December. The calendar is gentle other than these occasions.

Company Occasion Calendar

Wall Avenue Horizon

The Technical Take

WMG is above its 200-day transferring common for the primary time since February after a sequence of upward thrusts on quantity since late October. It appeared the downtrend was in full power when the inventory notched contemporary lows in mid-October in the beginning of earnings season. That now seems to be like a bullish false breakdown. WMG closed final week at contemporary 7-month highs, and it may have eyes on the $38 to $39 space – the March/April peak.

Shares initially broke free from a downtrend resistance line in the summertime, then held that trendline on the best way right down to the This autumn low. Alongside the best way, a bearish false breakout came about in early August, and sellers swiftly took the inventory decrease by about 35% in about two months. I see help from excessive quantity beginning at $31, so shares arrange for a good danger/reward right here.

WMG: Shares Rally Above Resistance, Eyeing the Excessive $30s

The Backside Line

Regardless of a debt burden and the specter of decrease earnings within the new 12 months, I assert the valuation is affordable given WMG’s longer-term development outlook. Furthermore, the technical image seems to be a lot improved after a tricky first three quarters of the 12 months.

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