On July 19, 2023, Warner Bros. Discovery Inc (WBD, Financial) saw a significant change in its stock price, moving up by 3.99% to $13.28. With a market capitalization of $32.4 billion, the company's present GF Value stands at $24.35. The GF Value, a unique measure of a stock's intrinsic worth, suggests that Warner Bros. Discovery could be a potential value trap, warranting a second thought before investment.
Warner Bros. Discovery, the result of merging two substantial media firms, has emerged as one of the world's largest media companies with impressive scale and reach. Boasting a portfolio of global networks such as HBO, Discovery, CNN, and TLC, as well as popular franchises like Superman, Rick and Morty, and Game of Thrones, the company's influence is undeniable. Its content production studios include Warner Bros., HBO, Discovery Studios, DC Films, and Cartoon Network Studios. Furthermore, Warner Bros. Discovery operates two major streaming services, Max and Discovery+.
GF Value and Valuation Analysis
The GF Value is an estimation of a stock's fair value based on historical trading multiples, an adjustment factor from GuruFocus based on past performance and growth, and estimates of future business performance. If a stock's price significantly exceeds the GF Value Line, it is likely overvalued, and its future return could be poor. Conversely, if it is substantially below the GF Value Line, its future return will likely be higher. Given the current price of Warner Bros. Discovery and its market cap, the stock appears to be a potential value trap.
However, it's worth noting that Warner Bros. Discovery's Beneish M-Score is -0.41, which is higher than -1.78, suggesting that the company might be a manipulator. Moreover, the company's Altman Z-score is 0.31, indicating distressed financial conditions and a higher risk of bankruptcy. An Altman Z-score above 2.99 would suggest safer financial conditions. To learn more about the Z-score and how it measures a company's financial risk, please click here.
Financial Strength Analysis
Companies with poor financial strength pose a high risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. The cash-to-debt ratio and interest coverage are excellent indicators of this. Warner Bros. Discovery's cash-to-debt ratio is 0.05, ranking worse than 90.72% of companies in the Media - Diversified industry. This indicates that Warner Bros. Discovery's financial strength is poor, ranking 3 out of 10.
Profitability Analysis
Investing in profitable companies is less risky, especially those with consistent profitability over the long term. Warner Bros. Discovery has been profitable eight times over the past ten years. Over the past twelve months, the company had a revenue of $41.4 billion and EPS of $-3.71. Its operating margin is -10.36%, which ranks worse than 74.29% of companies in the Media - Diversified industry. Despite this, the company's profitability is strong, ranking 8 out of 10.
Growth Analysis
Growth is a critical factor in a company's valuation. The 3-year average annual revenue growth rate of Warner Bros. Discovery is 3.6%, ranking better than 61.72% of companies in the Media - Diversified industry. However, its 3-year average EBITDA growth rate is -10.2%, ranking worse than 69.62% of companies in the same industry.
ROIC vs WACC Analysis
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is a reliable method to determine its profitability. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Warner Bros. Discovery’s ROIC is -3.3, and its WACC is 8.63.
Conclusion
In conclusion, the stock of Warner Bros. Discovery (WBD, Financial) gives every indication of being a potential value trap. The company's financial condition is poor, but its profitability is strong. Its growth ranks worse than 69.62% of companies in the Media - Diversified industry. To learn more about Warner Bros. Discovery stock, you can check out its 30-Year Financials here.
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