On July 18, 2023, shares of Warner Bros. Discovery Inc (WBD, Financial) experienced a 3.74% increase, with the stock price standing at $12.77. The company, with a market cap of $31.1 billion, is currently trading below its GuruFocus Value of $24.39. This discrepancy suggests that the stock might be undervalued, but is it a value trap? Let's delve into a detailed analysis.
Warner Bros. Discovery, born from the merger of two significant media firms, is a global media powerhouse. The company boasts a portfolio of renowned networks such as HBO, Discovery, CNN, and TLC, and popular franchises like Superman, Rick and Morty, and Game of Thrones. Its content production studios include Warner Bros., HBO, Discovery Studios, DC Films, and Cartoon Network Studios. Warner Bros. Discovery also operates two major streaming services, Max and Discovery+.
GF Value: A Possible Value Trap
The GF Value is a unique indicator of a stock's intrinsic worth, derived from historical trading multiples, an adjustment factor from GuruFocus based on past performance and growth, and estimates of future business performance. For Warner Bros. Discovery, the current GF Value suggests that the stock might be a value trap, warranting a second thought before investment.
Warner Bros. Discovery's Beneish M-Score, a measure of earnings manipulation, is -0.41, higher than the ideal -1.78, hinting at potential manipulation. Additionally, the company's Altman Z-score of 0.3 puts it in the distressed zone, implying a higher risk of bankruptcy. A safer financial condition would be indicated by a Z-score above 2.99. Learn more about how the Z-score measures financial risk here.
Financial Strength
Investing in financially weak companies carries a higher risk of capital loss. Hence, understanding a company's financial strength is crucial before buying its stock. Warner Bros. Discovery's cash-to-debt ratio of 0.05 is worse than 90.72% of companies in the Media - Diversified industry, and its overall financial strength is ranked 3 out of 10 by GuruFocus, indicating poor financial health.
Profitability
Investing in profitable companies carries less risk. Warner Bros. Discovery has been profitable for 8 out of the past 10 years. However, its operating margin of -10.36% is worse than 74.26% of companies in the Media - Diversified industry. Despite this, GuruFocus ranks Warner Bros. Discovery’s profitability as strong.
Growth
Growth is a crucial factor in company valuation. Warner Bros. Discovery's 3-year average annual revenue growth rate is 3.6%, 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 69.54% of its industry peers.
ROIC vs WACC
Comparing a company’s return on invested capital (ROIC) to its weighted average cost of capital (WACC) can provide insights into its profitability. Warner Bros. Discovery’s ROIC of -3.3% falls short of its WACC of 8.57%, suggesting it may not be creating value for its shareholders.
Conclusion
Summing up, the stock of Warner Bros. Discovery (WBD, Financial) might be a potential value trap. Despite strong profitability, the company's financial condition is poor, and its growth ranks below average within the Media - Diversified industry. For a more comprehensive understanding of Warner Bros. Discovery's financials, check out its 30-Year Financials here.
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