By Eric J. Savitz
Warner Bros. Discovery shares have been sagging badly, down 25% this year and 33% over the past 12 months. At least one analyst thinks the situation will only get worse as the company struggles with a deteriorating cable TV market and more viewers abandon that traditional model for streaming services.
On Tuesday, Wolfe Research analyst Peter Supino cut his rating on Warner shares to Underperform from Peer Perform, setting a price target of $7, about 17% below Monday's close. Despite the downgrade, the stock is up 1% to $8.56 in Tuesday trading.
Supino's view is that the outlook gets riskier from here. The parent of channels like Max, TBS, and CNN has already benefited from the cost synergies of the Warner-Discovery merger. Plus, TV distribution renewals lie ahead amid a deteriorating market for linear cable channels.
He also said Warner faces "pressure to invest," with its National Basketball Association TV contract coming up for negotiations. Warner's TNT splits the current national broadcasts of the NBA with Walt Disney's ESPN. That deal expires at the end of the 2024-2025 season. The analyst said that the next NBA deal will be more expensive given increased interest for rights from streaming video providers.
The analyst noted that Warner has $44 billion of gross debt, about nine years of run-rate free cash flow. Supino added that the company should produce $9.8 billion in Ebitda, or earnings before interest, taxes, depreciation and amortization, this year driven by $7.5 billion of "high margin...linear TV advertising," a market "whose decline keeps accelerating." Supino said he fears that Ebitda peaked in 2023 at $10.2 billion as the linear business keeps eroding.
"Linear advertising ex-sports won't recover, ratings are getting worse, pricing power lost," he wrote. "WBD is at a disadvantage with less broadcast sports and little streaming ad inventory."
Warner couldn't immediately be reached for comment.
Write to Eric J. Savitz at eric.savitz@barrons.com
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(END) Dow Jones Newswires
April 23, 2024 11:11 ET (15:11 GMT)
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