Analysts at Wolfe Research on Friday upgraded Warner Bros Discovery Inc WBD, saying after a tumultuous 2022 the “skeletons in Warner’s closet have been accounted for,” indicating an upside from here.
The Wolfe Analyst: Peter Supino upgraded Warner Bros to an Outperform rating with a $20 price target.
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Supino told investors the upgrade comes almost a year after the merger with Discovery, during which time guidance and the stock have fallen, but internal visibility has increased.
Wolfe noted Warner Bros. execution, free cash flow and deleveraging should improve in 2023 and 2024.
The analyst said media executives have been rewarded for growth over profitability and long-term business sustainability for many years now, citing a quote from Berkshire Hathaway’s Charlie Munger, “Show me the incentive, I’ll show you the outcome.”
Wolfe noted Warner Bros. execs are being paid for free cash flow and debt paydowns, which is why the firm expects Warner to deliver more than 50% of EBITDA to free cash flow as merger-driven charges subside.
Supino said there is a path to profitability for direct-to-consumer, solid Studio growth and that the valuation and outlook already bake in a “Draconian” scenario for Networks segment.
Wolfe said the extremely low expectations for the Networks segment and management’s disciplined approach to expenses give confidence there is minimal downside built into the valuation for linear TV networks.
Additionally, Supino told investors Warner Bros.’ management’s incentive realignment by the board gives confidence in a meaningful debt-to-equity transfer, as the directive is to hit free-cash-flow and leverage targets.
WBD Price action: Shares of Warner Bros were trading 1.27% higher to $14.34 at market close Friday, according to data from Benzinga Pro.
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