One of Wall Street's biggest winners of the day is Warner Bros. Discovery, a entertainment company whose shares have climbed 5.9% to a price of $13.77 -- 40.9% below its average analyst target price of $23.3. The average analyst rating for the stock is buy. WBD may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 30.7% over the last year, returning -47.0%.
Warner Bros. Discovery's trailing 12 month P/E ratio is 7.6, based on its trailing Eps of $1.81. The company has a forward P/E ratio of 35.3 according to its forward Eps of $0.39 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US communication services companies is 18.65, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Warner Bros. Discovery's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -1.23. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing WBD's growth potential .
To gauge the health of Warner Bros. Discovery's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
WBD's average gross profit margins over the last four years are 63.9%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -0.3%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Warner Bros. Discovery's last four annual reports, we are able to obtain the following rundown of its free cash flow:
- 2021 free cash flow: $2,425,000,000.00
- 2020 free cash flow: $2,337,000,000.00
- 2019 free cash flow: $3,110,000,000.00
- 2018 free cash flow: $2,429,000,000.00
- Average free cash flow: $2,575,250,000.00 %
- Average free cash flown growth rate: 2.3 %
- Coefficient of variability (the lower the better): 13.9 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, WBD is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Warner Bros. Discovery's P/B ratio of 0.7 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Communication Services sector was 2.62 as of the third quarter of 2022.
Warner Bros. Discovery is by most measures undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because it has a a negative PEG ratio and consistently strong gross margins. We hope you enjoyed this overview of WBD's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.
