Warner Bros. Discovery, formed from a $43 billion merger between AT&T’s WarnerMedia and Discovery, has seen its shares plummet by 30% in the first four months of this year, falling from $11 to under $8. This drop is attributed to various factors such as a weak advertising market, cord cutting trends, and concerns over losing NBA broadcasting rights. Additionally, CEO David Zaslav’s lavish pay has also sparked investor discontent, with his compensation reaching $49.7 million in 2023. Despite these challenges, the company’s financial statements reveal a strong free cash flow, which has increased from $2.4 billion to over $6 billion post-merger.
While Warner Bros. Discovery has been facing setbacks, its free cash flow yield per share of 30% is the highest among S&P 500 companies, surpassing even American Airlines at 20%. This metric, favored by value investors like Warren Buffett, highlights the company’s financial strength and potential for future growth. By focusing on cash flow rather than just earnings per share, investors can gain valuable insights into a company’s ability to pay down debt, buy back shares, or pay dividends without having to borrow more money or dip into reserves.
Hedge fund manager Seth Klarman, known for his value investing approach, took a significant stake in Warner Bros. Discovery when the stock was trading at a higher price. The company’s focus on paying down debt post-merger has been successful, with debt levels reduced from over $56 billion to $47.29 billion by the end of the last fiscal year. CEO David Zaslav has highlighted this debt reduction as a top priority and expects further deleveraging in 2024, demonstrating a commitment to strong financial management.
Warner Bros. Discovery’s streaming service, Max, is closing in on 100 million subscribers based on recent filings. While the company’s organic growth strategy remains important, potential merger talks with Paramount Global have reportedly stalled. Analysts are eagerly awaiting the company’s upcoming earnings announcement on May 9th, with predictions of around $2.2 billion in advertising revenue for the first quarter. There are expectations for Warner Bros. Discovery to generate over $4 billion in free cash flow this year, which could help further reduce debt and bolster investor confidence in the company’s prospects.
As Warner Bros. Discovery continues to navigate challenges in the media and entertainment industry, its strong free cash flow and potential for growth have caught the attention of value investors like Klarman. Despite the stock’s decline and investor concerns, the company’s financial resilience and focus on debt reduction could position it well for the future. By emphasizing cash flow metrics and staying true to its strategic priorities, Warner Bros. Discovery may be able to weather the storm and emerge stronger in the competitive media landscape.
