Warner Bros. Discovery (NASDAQ:WBD) fell 3.20% to $10.28 after Wells Fargo analysts downgraded the stock to ‘equal-weight’ from ‘overweight.’
The analysts also lowered their price target on the stock to $12 from $16, saying their thesis has changed and they now expect lower earnings with a static multiple, instead of deleveraging w/ multiple expansion.
“Lower earnings have been the story since the merger, and the trend limits future multiple expansion…we now expect a flattish multiple (6xs EV/EBITDA, low-7xs incl. securitized debt),” analysts said in a note to clients Monday.
Analysts are also less favorable on M&A, noting that equity investors have limited tolerance for more debt regardless of strategic rationale.
While acknowledging that the HBO slate is stronger in ’24 and able to support net adds, analysts are concerned about the challenges facing management, which is “caught between scaling DTC and deleveraging through licensing deals.”
“WBD epitomizes Media's opportunities and risks. Its DTC business is underpinned by HBO - arguably the gold standard for original series. Warner Bros. studio has strong franchises and gaming.”
“But, the Networks division is facing pressures from ratings declines and cord cutting. With above-average leverage, it renders WBD's multiple on the more modest side of Media stocks. Deleveraging/FCF could add to equity value, while secular challenges creates multiple compression risk,” analysts added.
At present, they see earnings pressure as too great to outweigh any potential positives identified.