Is There An Opportunity With Warner Music Group Corp.'s (NASDAQ:WMG) 27% Undervaluation?

Simply Wall St.12-23 19:30

Key Insights Warner Music Group's estimated fair value is US$42.70 based on 2 Stage Free Cash Flow to Equity Warner Music Group's US$31.16 share price signals that it might be 27% undervalued ...

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Warner Music Group's US$31.16 share price signals that it might be 27% undervalued. The US$36.05 analyst price target for WMG is 16% less than our estimate of fair value. How far off is Warner Music Group Corp.  from its intrinsic value?Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow  model on this occasion. It may sound complicated, but actually it is quite simple!We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00BKPKM429.USD":"NEUBERGER BERMAN GLOBAL SUSTAINABLE EQUITY \"A\" (USD) ACC","FCF":"第一联邦金融","TSYW.SI":"TESLA 3xLongSG261006","IE00B64PRP62.GBP":"GUINNESS GLOBAL MONEY MANAGERS \"C\" (GBP) ACC","BK4561":"索罗斯持仓","IE00B3QW5Z07.USD":"GUINNESS GLOBAL MONEY MANAGERS \"C\" (USD) ACC","USAW.SI":"AMZN 3xLongSG261006","IE00BGHQF748.EUR":"GUINNESS GLOBAL MONEY MANAGERS \"C\" (EUR) ACC",".IXIC":"NASDAQ Composite","BK4112":"金融交易所和数据","WMG":"华纳音乐","NVIW.SI":"NVDA 3xLongSG261006","USJW.SI":"ALPHAB 3xLongSG261006","QID":"纳指两倍做空ETF","BK4588":"碎股","NDAQ":"纳斯达克OMX交易所","BK4108":"电影和娱乐","BK4571":"数字音乐概念","DCF":"Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc","BK4585":"ETF&股票定投概念","QLD":"纳指两倍做多ETF","TQQQ":"纳指三倍做多ETF","BK4100":"有线和卫星","BK4211":"区域性银行","SQQQ":"纳指三倍做空ETF","LU2095319765.USD":"Natixis Thematics Subscription Economy R/A USD","LU2210150020.SGD":"Natixis Thematics Subscription Economy R/A SGD","TV":"墨西哥电视","PSQ":"纳指反向ETF","LU2210149790.SGD":"Natixis Thematics Subscription Economy R/A SGD-H"},"translate_title":"华纳音乐集团公司（纳斯达克：WMG）估值被低估27%，是否存在机会？","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"WMG":1,".IXIC":1,"NDAQ":1,"FCF":1,"DCF":1,"TV":1,"TSYW.SI":0.6,"TQQQ":0.6,"SQQQ":0.6,"QLD":0.6,"USAW.SI":0.6,"QID":0.6,"PSQ":0.6,"NVIW.SI":0.6,"USJW.SI":0.6,"NQmain":0.6,"MNQmain":0.6},"content_text":"Key Insights\n\n Warner Music Group's estimated fair value is US$42.70 based on 2 Stage Free Cash Flow to Equity \n Warner Music Group's US$31.16 share price signals that it might be 27% undervalued \n  The US$36.05 analyst price target for WMG is 16% less than our estimate of fair value \n\n How far off is Warner Music Group Corp. (NASDAQ:WMG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple! \n We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. \n View our latest analysis for Warner Music Group \n The Calculation \n We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. \n Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: \n 10-year free cash flow (FCF) forecast \n\n\n\n\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n2034\n\n\n Levered FCF ($, Millions) \nUS$739.8m\nUS$851.9m\nUS$1.01b\nUS$1.21b\nUS$1.30b\nUS$1.37b\nUS$1.44b\nUS$1.49b\nUS$1.55b\nUS$1.60b\n\n\nGrowth Rate Estimate Source\nAnalyst x8\nAnalyst x7\nAnalyst x3\nAnalyst x1\nAnalyst x1\nEst @ 5.40%\nEst @ 4.56%\nEst @ 3.98%\nEst @ 3.57%\nEst @ 3.29%\n\n\n Present Value ($, Millions) Discounted @ 8.0% \nUS$685\nUS$730\nUS$803\nUS$891\nUS$887\nUS$865\nUS$838\nUS$807\nUS$773\nUS$740\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$8.0b\n The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.0%. \nTerminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$1.6b× (1 + 2.6%) ÷ (8.0%– 2.6%) = US$30b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$30b÷ ( 1 + 8.0%)10= US$14b\n The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$22b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$31.2, the company appears a touch undervalued at a 27% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. \n\n\n\n  NasdaqGS:WMG Discounted Cash Flow December 23rd 2024\n \n\n Important Assumptions \n The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Warner Music Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.0%, which is based on a levered beta of 1.307. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. \nSWOT Analysis for Warner Music Group\n\n\nStrength\n\nEarnings growth over the past year exceeded the industry.\n\n\nDebt is well covered by earnings.\n\n\nDividends are covered by earnings and cash flows.\n\n\nDividend information for WMG.\n\n\n\nWeakness\n\nEarnings growth over the past year is below its 5-year average.\n\n\nDividend is low compared to the top 25% of dividend payers in the Entertainment market.\n\n\n\nOpportunity\n\nAnnual earnings are forecast to grow faster than the American market.\n\n\nTrading below our estimate of fair value by more than 20%.\n\n\n\nThreat\n\nDebt is not well covered by operating cash flow.\n\n\nAnnual revenue is forecast to grow slower than the American market.\n\n\nIs WMG well equipped to handle threats?\n\n\n\n Moving On: \n Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For Warner Music Group, we've put together three essential elements you should explore: \n\n Risks: For example, we've discovered 2 warning signs for Warner Music Group (1 is a bit unpleasant!) that you should be aware of before investing here. \nFuture Earnings: How does WMG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.\n Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! \n\n PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.\nHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2493003755"}