Unveiling Warner Music Group (WMG)'s Value: Is It Really Priced Right? A Comprehensive Guide
Warner Music Group Corp (NASDAQ:WMG) recently experienced a daily loss of -3.31%, but has seen a 3-month gain of 18.5%. With an Earnings Per Share (EPS) (EPS) of 0.8, the question arises: is the stock modestly undervalued? This article provides a detailed valuation analysis of Warner Music Group (NASDAQ:WMG), encouraging the reader to delve into the financial intricacies of the firm.
Company Introduction
Warner Music Group Corp (NASDAQ:WMG) is the third-largest global record label, trailing behind Universal Music and Sony Music. The company operates through iconic labels such as Atlantic Records, Warner Records, and Parlophone Records, and represents popular artists like Ed Sheeran, Cardi B, Dua Lipa, and Blake Shelton. Warner Chappell, the firm's publishing arm, houses over 65,000 composers and songwriters with over a million copyrights represented. The company is controlled by Access Industries, which owns an 84% economic interest and 99% of voting rights.
As of September 20, 2023, Warner Music Group (NASDAQ:WMG) traded at a price of $30.71 per share, while its fair value (GF Value) is estimated at $38.69, suggesting that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is computed based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to the GF Value, the stock of Warner Music Group (NASDAQ:WMG) appears to be modestly undervalued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns.
Given that Warner Music Group is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy shares. Warner Music Group has a cash-to-debt ratio of 0.14, ranking it lower than 81.18% of 1004 companies in the Media - Diversified industry. Based on this, GuruFocus ranks Warner Music Group's financial strength as 4 out of 10, suggesting a poor balance sheet.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Warner Music Group has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $5.90 billion and an Earnings Per Share (EPS) (EPS) of $0.8. Its operating margin is 12.46%, ranking better than 78.89% of 1028 companies in the Media - Diversified industry. Overall, GuruFocus ranks the profitability of Warner Music Group at 6 out of 10, indicating fair profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth, according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Warner Music Group is 8.9%, ranking better than 73.64% of 956 companies in the Media - Diversified industry. The 3-year average EBITDA growth is 20.1%, ranking better than 71.34% of 771 companies in the Media - Diversified industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, Warner Music Group's ROIC is 8.8, and its WACC is 12.23.
Conclusion
Overall, Warner Music Group (NASDAQ:WMG) stock appears to be modestly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks better than 71.34% of 771 companies in the Media - Diversified industry. To learn more about Warner Music Group stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
