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Warner Bros. Discovery Stock Downgraded on Less Favorable M&A, Earnings Outlook, Content Licensing

Wells Fargo analyst Steven Cahall started the week by downgrading his rating on Warner Bros. Discovery shares, which had gained in 2023, from “overweight” to “equal weight” and cutting his stock price target by $4 to $12.

“We’re changing our WBD thesis from deleveraging with multiple expansion to lower earnings before interest, taxes, depreciation a1nd amortization (EBITDA) with a static multiple,” he explained in a report in which he reduced his financial forecasts. “We also back off a ’24 take-out thesis.”

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Indeed, Cahall previously pushed the idea of Comcast acquiring WBD, led by CEO David Zaslav. But now, he noted, he has turned “less favorable on M&A.” Wrote the expert: “While we’ve pushed the prospect of Comcast for WBD, Comcast has talked it down of late, and even if it makes sense, we don’t see any urgency in an election year.”

WBD buying a peer, meanwhile, would come with risks, Cahall argued. “Paramount Global, or some of its assets like CBS, are or could be available, but equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” he explained. “This means WBD’s opportunities are primarily organic. We do forecast a much stronger HBO slate in ’24, but also continued networks pressures.”

All in all, he cut his 2024 earnings estimate from $10.5 billion to below $10 billion and his 2025 forecast from $11.2 billion to $10.4 billion, down 5 percent and 7 percent, respectively, speaking of “earnings challenges.”

The Wells Fargo analyst also discussed the recent company and industry trend to return to licensing programming to others. “Content licensing is a double-edged sword,” Cahall emphasized. “WBD is experimenting with licensing of HBO and Warner Bros. content to services like Netflix. One way to accelerate EBITDA and free cash flow would be to let marquee titles like The Sopranos, Game of Thrones or Friends go to deep-pocketed streamers instead of Max — likely billions of untapped revenue potential. But, this would come at the expense of Max engagement (we estimate about 27 minutes per day).”

Concluded the expert: “Management is caught between scaling direct-to-consumer and deleveraging through licensing deals.”

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