Warner Bros. Discovery Shows Strong FCF and Deleveraging, Analysts Weigh in on Stock Prospects

Credit Suisse analyst Douglas Mitchelson reiterated an Outperform rating on Warner Bros. Discovery, Inc WBD with a price target of $32.

WBD reported 2Q23 revenue $90 million ahead and EBITDA $201 million ahead, driven by outperformance at DTC due to licensing deals timing and higher ARPU following Max relaunch.

The 2Q FCF was $1.722 billion, $789 million ahead of Mitchelson's estimate and $836 million ahead of Street, primarily driven by working capital optimization.

The company updated full-year 2023 adjusted EBITDA guidance to be at the low end of the $11 billion - 11.5 billion target range, 2023 FCF to be $4.5 billion -5 billion, and 3Q FCF similar to 2Q's $1.7 billion and raised merger synergy target $1 billion to $5 billion total.

Mitchelson kept 2023-25 EBITDA estimates unchanged. 2023 FCF is increased by $179 million to $4.750 billion, driven by improved working capital and timing benefit from the strike. 

He raised the 2023 adjusted EPS by $0.13 to $2.57 due to 2Q flow through. For 3Q, he now forecasts -1.2 million streaming net adds. 3Q studio performance is fluid, given Barbie's strong box office results but lower internal licensing revenue and the potential impact of strikes. 

KeyBanc analyst Brandon Nispel's reiterated Sector Weight on the stock.

Nispel tweaked his below consensus and guidance EBITDA estimates while boosting his FCF expectations. WBD results had a couple of one-time benefits in 2Q, though the net was mixed. 

From now on, a slow ad market recovery and an uncertain second-half film slate/content pipeline, given the WGA strike, are the key debates. 

While he lauded WBD's attempts to drive FCF and delever, which is beginning to make the stock look very attractive from an EV/EBITDA and EV/FCF perspective, he flagged the Linear TV trajectory where profitability is lower in perpetuity, the long-term profitability of DTC and discounted some strength in Studios. 

Nispel sees guidance commentary on advertising as very negative for Walt Disney Co DIS, Fox Corp FOXA, and Paramount Global  PARA, all of which speak to a second-half recovery in advertising. 

Needham analyst Laura Martin maintained a Hold rating. The analyst flagged a strong FCF of $1.7 billion in 2Q, well above her estimate. WBD repaid $1.6 billion of debt in 2Q and announced a tender offer for another $2.7 billion of debt.

DTC (i.e., Max & Discovery+) reported an adjusted EBITDA loss of $3 million, a $555 million improvement Y/Y on revenue up 13% Y/Y. 

Global ARPU reached $7.71 in 2Q23, up 3% Q/Q. U.S. subscriber losses were 1.3 million Y/Y, and international subscriber losses were 0.5 million Y/Y in 2Q23. DTC ad revenue rose 25% Y/Y in 2Q. 

WBD estimates "about 4 million global overlapping sus with both Discovery+ and HBO Max at 6/30/23", mainly in the U.S. WBD saw several hundred thousand disconnects during 2Q, and this should continue because paying for Max now includes 100% of Discovery+ content.

Price Action: WBD shares traded higher by 7.49% at $13.86 on the last check Friday.