Warner Music Group (WMG): Shares Have A Positive Beat Following Impressive Q4 Results

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A lot of ink has been spilled about how higher interest rates should crush highly levered growth companies. In reality, the S&P 500’s weighted-average cost of capital is indeed higher from a year ago, but it remains very low by historical averages.

Sure, a two-percentage-point year-on-year climb is big, but the WACC was never 0% as so many pundits like to toss around. It bottomed out near 4% a year ago.

One company with a significant debt burden took the higher-rate environment on the chin for much of this year, but there is music to my ears when weighing the valuation and technicals.

Borrowing Costs Rise

Borrowing Costs Rise

Goldman Sachs Investment Research

According to Bank of America Global Research, Warner Music Group (NASDAQ:WMG) is a leading music entertainment company and owner of major record labels, including Atlantic Records, Warner Records, Elektra Records, and Parlophone Records. The company’s Recorded Music business is home to many of the world’s most popular and influential recording artists. Warner Chappell Music, WMG’s music publishing business, represents works by over 80,000 songwriters and composers with a collection of more than 1.4 million music compositions.

The New York-based $16.8 billion market cap Entertainment industry company within the Communication Services sector trades at a high 30.7 trailing 12-month GAAP price-to-earnings ratio and pays a market-level 2.0% dividend yield, according to The Wall Street Journal.

Recently, Warner produced a strong Q4 earnings beat, according to Seeking Alpha, and shares jumped 14% while reporting double-digit growth in margins. Following the better-than-expected quarterly results, BofA upgraded the stock, leading to another jump in the share price. While streaming-related companies are struggling amid so many platforms available via the direct-to-consumer method, this music producer appears to see few dings to growth.

Downside risks include FX headwinds (though a lower U.S. dollar from several weeks ago is a boon), subscription renewal challenges, and ongoing tensions in Ukraine. More importantly, WGM could lose market share to bigger players like Sony and Universal.

On valuation, analysts at BofA see earnings falling slightly next year after a stellar 2022. Per-share profits are then expected to rise at a solid clip in 2024 and 2025. The Bloomberg consensus forecast is not quite as optimistic as BofA’s outlook, but it too shows a return to growth after next year. Dividends, meanwhile, should continue to increase.

Still, both the operating and GAAP P/Es look to remain high in the coming quarters and the EV/EBITDA multiple, which is key for many media & entertainment companies, is not a screaming buy. The upshot is WMG is free cash flow positive. With a forward PEG ratio of just 1.21, according to Seeking Alpha, I think the high P/E is fine given the growth outlook.

Warner Music: Earnings, Valuation, Dividend Forecasts

Warner Music: Earnings, Valuation, Dividend Forecasts

BofA Global Research

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Tuesday, February 7 BMO. Before that, there is a dividend payment date on the first of December. The calendar is light aside from those events.

Corporate Event Calendar

Corporate Event Calendar

Wall Street Horizon

The Technical Take

WMG is above its 200-day moving average for the first time since February after a series of upward thrusts on volume since late October. It appeared the downtrend was in full force when the stock notched fresh lows in mid-October at the start of earnings season. That now looks like a bullish false breakdown. WMG closed last week at fresh 7-month highs, and it could have eyes on the $38 to $39 area – the March/April peak.

Shares initially broke free from a downtrend resistance line in the summer, then held that trendline on the way down to the Q4 low. Along the way, a bearish false breakout took place in early August, and sellers swiftly took the stock lower by about 35% in about two months. I see support from high volume starting at $31, so shares set up for a favorable risk/reward here.

WMG: Shares Rally Above Resistance, Eyeing the High $30s

WMG: Shares Rally Above Resistance, Eyeing the High $30s

Stockcharts.com

The Bottom Line

Despite a debt burden and the threat of lower profits in the new year, I assert the valuation is reasonable given WMG’s longer-term growth outlook. Moreover, the technical picture looks much improved after a tough first three quarters of the year.

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