Warner Bros. Discovery is currently trading at $9.48 per share and has a Graham number of $30.58, which implies that it is -69.0% below its fair value. We calculate the Graham number as follows:
√(22.5 * earnings per share * book value per share) = √(22.5 * 1.81 * 19.982) = 30.58
The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following:
Sales Revenue Should Be No Less Than $100 million.
For Warner Bros. Discovery, average sales revenue over the last few years has been $11,335,333,333, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Warner Bros. Discovery's current ratio by dividing its total current assets of $7,264,000,000 by its total current liabilities of $3,459,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Warner Bros. Discovery’s case, current assets outweigh current liabilities by a factor of 2.1.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Warner Bros. Discovery’s debt ratio is 3.8, the company has too much debt. We calculate Warner Bros. Discovery’s debt to net current assets ratio by dividing its total long term of debt of $14,420,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
Warner Bros. Discovery had negative retained earnings in 2008 and 2009, but the recent average is positive at 8,485,333,333. Retained earnings are the are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Warner Bros. Discovery has never offered any regular dividends.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
We are going to compare Warner Bros. Discovery's earnings per share averages from the two 'bookends' of the 66 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2008, whose EPS values of $-0.24, $0.98, and $0.98 average out to $0.57. Next we look at the years 2014, 2014, and 2014, whose values of $0.54, $0.41, and $0.38 average out to $0.44. The growth rate between the two averages does not meet Graham's standard since it is -22.81%.
It may be trading far below its fair value, but Warner Bros. Discovery does not have the profile of a defensive stock according to Benjamin Graham's criteria because it has:
- impressive sales revenue
- an excellent current ratio
- too much debt
- negative retained earnings in 2008 and 2009
- no dividend record
- decreasing earnings per share
