Bright Future for Warner Bros. Discovery, Thanks To Content Slate and Debt Reduction Plans: Analyst

Macquarie analyst Tim Nollen maintained an Outperform rating on Warner Bros. Discovery, Inc WBD with a $20 price target.

WBD announced reducing its guidance for FY23 adjusted EBITDA from the low end of $11 billion - $11.5 billion to a range of $10.5 billion - $11 billion due to the ongoing writers' and actors' strikes. 

Related: Hollywood Strike Impact - Warner Bros. Discovery Revises Annual Outlook

As of the Q2 earnings call, WBD expected to resolve these strikes by September, so the company revised guidance with no end in sight. 

Prolonged strikes already mean a weaker content slate in Q4, impacting all divisions. 

On the flip side, the company also raised FY23 FCF guidance from $4.5 billion - $5 billion to now at least $5 billion due to cash cost savings from the studio shutdown and the box office success of Barbie. 

With a boost from the $2.7 billion in debt tendered last month, WBD remains confident in achieving its target of <4x net debt/EBITDA by year-end FY23 and also reiterated its goal of 2.5-3x gross debt/EBITDA by year-end FY24. 

The low valuation on WBD stock vs. peers is mainly due to the high debt load, but he sees the company's eagerness and ability to pay down debt reducing this risk over time. 

The analyst also notes market anxieties over the state of the linear bundle on the Walt Disney Co DIS and Charter Communications, Inc CHTR carriage dispute. 

Linear networks comprise 50% of WBD revenue in 2023. Hence, any accelerated cord-cutting adds to the pressure; he believes WBD has breadth and depth in DTC in the U.S. and internationally to overcome this. 

Nollen reduced his FY23 adjusted EBITDA estimates from $11.1 billion to $10.8 billion; his FY24 fell slightly from $12.0 billion to $11.9 billion. 

However, that number could swing in either direction depending on the timing of the strikes and other factors, including ad sales. 

The broader rollout of Max internationally, growth in ad-supported base generating premium ad CPM, sports streaming, and WBD's lead over its peers in the gaming world justify a positive outlook on its prospects.

Rosenblatt analyst Barton Crockett reiterated Warner Bros. Discovery with a Sell and a $10 price target.

Price Action: WBD shares are down 2.55% at $11.34 on the last check Wednesday.