On Tuesday, Evercore ISI adjusted its financial model for Warner Brothers Discovery (NASDAQ:WBD) shares, resulting in a reduced price target. The new price target is set at $10.00, down from the previous $12.00, while the firm maintains an Outperform rating on the stock.
The revision reflects lower expected contributions from the Studio segment, which has seen underwhelming box office performances recently. Consequently, Evercore ISI has lowered its EBITDA forecast for Warner Brothers Discovery from the initial $2.00 billion to $1.93 billion, which falls below the consensus estimate of $2.14 billion.
Despite a promising theatrical lineup for the latter half of the year, including titles like "Beetlejuice Beetlejuice" and "Joker: Folie à Deux," the analyst sees limited factors to counterbalance the more conservative outlook for the second quarter of 2024.
The full-year 2024 EBITDA estimate has been revised downward from $10.0 billion to $9.70 billion, aligning closely with the market's expectations. However, the free cash flow (FCF) projection for the second quarter has improved, rising from $801 million to $1.10 billion, with the annual FCF estimate remaining steady at $4.77 billion. This stability is attributed to effective working capital management and its distribution over the quarters.
The new price target of $10.00 is based on a 5.4x enterprise value to EBITDA (EV/EBITDA) multiple and a 21.8% free cash flow yield on the firm's 2025 estimates. This contrasts with the current trading multiples of 4.8x EV/EBITDA and a 29.8% FCF yield. The upcoming clarity on the NBA media rights is identified as the next potential catalyst for the stock.
The analyst suggests that the outcome's impact on investor sentiment is uncertain, but emphasizes the importance of management's explanation of their decision at the upcoming earnings report to reassure investors about the company's short-term and long-term financial and strategic direction.
In other recent news, Paramount Global is reportedly exploring a merger with Warner Bros. Discovery to combine their streaming services, Paramount+ and Max, as part of a strategic move to strengthen their positions in the competitive streaming market. Concurrently, Goldman Sachs (NYSE:GS) has initiated a Neutral rating on Warner Bros.
Discovery stock, projecting a modest compound annual growth rate of 1% for the company's revenue over the next six years. This growth is expected to be driven by a 7% increase in direct-to-consumer services and a 2% rise in studio revenues. However, the firm also forecasts a contraction in Warner Bros. Discovery's EBITDA, attributing this to higher content costs, particularly related to sports rights.
In other recent developments, KeyBanc Capital Markets maintained an Overweight rating on Warner Bros. Discovery, suggesting that the company's EBITDA for its Networks segment might be lower with the NBA than without, given the current prices.
These developments reflect the ongoing strategic decisions and financial trajectories of both Paramount Global and Warner Bros. Discovery in the evolving entertainment industry.
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