Warner Bros. Discovery, Inc. (WBD) continues to tumble as the company recently said it expects as much as a billion more in restructuring charges compared to what the company had projected two months before.
In May last year, Discovery Inc. and AT&T Inc. (T) reached a deal to combine their assets into a new, publicly traded company, with T focusing more on its wireless business and Discovery aiming to boost its content library.
On April 8, 2022, the companies said that T’s WarnerMedia unit and Discovery had completed their merger to form a new combined company, WBD. Under the terms of the agreement, T received $40.40 billion in cash and WarnerMedia’s retention of certain debt at close.
Post the mega-merger, on October 24, 2022, WBD said that it expects to incur around $3.20 billion to $4.30 billion in pre-tax restructuring costs, with a bulk of it focused on content review. Approximate $2 billion to $2.50 billion will be spent on ‘strategic content programming assessments.’
It had also said that it expects to incur $800 million to $1.10 billion on organization restructuring, which includes employee severance, retention, relocation, and other related costs. In addition, facility consolidation activities and other contract termination costs were expected to come between $400 million and $700 million.
However, last week the company said it expects restructuring charges to rise by more than $1 billion to surpass $5.30 billion. Since its big merger, the company has undertaken significant layoffs, and many planned contents have also been scrapped. WBD also estimated that its content impairment and development write-off charges could rise by over a billion dollars to $3.50 billion by 2024.
In November, the company raised its cost-synergy target to $3.50 billion from $3 billion. WBD’s stock failed to surpass the consensus EPS and revenue estimates in the last reported quarter. Its EPS was 50.8% below analyst estimates, and its revenue missed the consensus estimate by 5%. It blamed a slow advertising market and merger charges for missing the consensus revenue estimate.
WBD’s stock has declined 57.9% in price year-to-date and 57.7% over the past year to close the last trading session at $9.91.
Here’s what could influence WBD’s performance in the upcoming months:
Mixed Financials
WBD’s total revenues increased 211.8% year-over-year to $9.82 billion for the third quarter ended September 30, 2022. The company’s adjusted EBITDA increased 233.9% year-over-year to $2.42 billion.
On the other hand, its net loss available to WBD came in at $2.31 billion, compared to $156 million in the prior-year period. In addition, its loss per share allocated to WBD Series A common stockholders came in at $0.95, compared to an EPS allocated to WBD Series A common stockholders of $0.24.
Mixed Analyst Estimates
WBD’s EPS for fiscal 2022 and 2023 is expected to be negative. Its revenue for fiscal 2022 and 2023 is expected to increase 256.7% and 2.4% year-over-year to $43.48 billion and $44.51 billion.
Mixed Valuation
In terms of trailing-12-month EV/S, WBD’s 2.95x is 49.1% higher than the 1.98x industry average. Likewise, its 8.35x forward EV/EBITDA is 7% higher than the 7.81x industry average.
However, its 0.55x forward P/S is 52.6% lower than the 1.17x industry average. Also, its 0.47x forward P/B is 74.6% lower than the 1.83x industry average.
Weak Profitability
WBD’s trailing-12-month net income margin is negative compared to the 4.51% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 9.25% industry average. Furthermore, the stock’s 0.31% trailing-12-month asset turnover ratio is 37.2% lower than the industry average of 0.49%.
POWR Ratings Reflect Bleak Prospects
WBD has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WBD has a C grade for Value, in sync with its mixed valuation.
It has a D grade for Quality, consistent with its weak profitability. In addition, its 1.35 beta justifies its D grade for Stability.
WBD is ranked last out of 16 stocks in the F-rated Entertainment – Media Producers industry. Click here to access WBD’s Growth, Momentum, and Sentiment ratings.
Bottom Line
WBD is trading below its 50-day and 200-day moving averages of $11.59 and $15.82, respectively, indicating a downtrend. The merger meant that the company’s gross debt now stands at $50.40 billion. Moreover, it also raised its restructuring charges by $1 billion. The company’s struggles can be gauged from its significant layoffs and the scrapping of planned content.
Given its significant debt and poor profitability, it could be wise to avoid the stock now.
How Does Warner Bros. Discovery, Inc. (WBD) Stack up Against Its Peers?
WBD has an overall POWR Rating of F, equating to a Strong Sell rating. You might want to consider investing in the following Entertainment – Media Producers stock with a B (Buy) rating: AMC Networks Inc. (AMCX).
WBD shares were trading at $9.61 per share on Monday morning, down $0.30 (-3.03%). Year-to-date, WBD has declined -62.31%, versus a -18.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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