Although two years has been difficult for investors in entertainment and telecommunications companies AT&T (NYSE: D), The market finally believes that the worst for the company has passed it. I say this because it follows Warnermedia’s final spinoff and merger with Discovery Warner Bros. Discovery (Nasdaq: WBD), The shares of both companies were well appreciated. AT&T shares, adjusted for the spinoff, rose 7.7% in a single day. Shares of WarnerMedia also rose 1.4%. This excitement may soon subside. But when evaluating the fundamental position of both companies, it becomes clear that there is still value for long-term investors. It is not possible to say that value opportunity is the same for both businesses. Clearly, there is a huge opportunity for those who focus on AT&T. But we now have a better understanding of what Warner Bros. Discovery looks like and how the market has acquired the new personal entertainment business.
AT&T stock is still severely underestimated
As I wrote in a previous article, AT&T still seems to be a significantly undervalued business after WarnerMedia’s spinoff. Based on some analysis I have conducted following the release of the company’s 2021 financial results, I have come to the conclusion that stocks offer an enormous amount of intervention to long-term investors. According to current data, the adjustment of the compensation that the business received through its spinoff should be approximately $ 114.83 billion in its net debt. The business holds another $ 5.13 billion in preferred shares and its market capitalization is $ 140.22 billion according to this article. Together, it offers $ 260.18 billion in corporate value.
As management previously described, the business is expected to generate about $ 41.5 billion in EBITDA in its 2022 fiscal year. This is expected to increase to $ 44 billion by 2023. Meanwhile, operating cash flow is expected to reach $ 40 billion this year and $ 44 billion next year. Taking these figures into account, the shares of the corporation seem to be much cheaper. Even after experiencing some reversal following the end of the spinoff, the business is trading at a price that will multiply cash flow using just 3.5 by its 2022 rating. If we trust the 2023 estimates it will drop to 3.2. Meanwhile, the EV for the company should be 6.3 in the first EBITDA Multiple 2022, and that number will drop to 5.9 next year.
AT&T may be the best company to compare now Verizon Communications (VZ). Currently, Verizon is trading at 5.7 times the cash flow operating price. This figure is actually projected to increase to 5.8 on a forward basis. Meanwhile, the company’s EV to EBITDA Multiple is 8.9. The forward reading for this is 8.1. To put this forward, we will use the 2022 forecasts for AT&T and compare them to the most conservative multiples for Verizon, with AT&T’s shareholders up between 54.2% and 62.6%, respectively.
Warner Bros. Discovery is not bad either
Although I’m convinced that there is a real chance at AT&T, Warner Bros. I’m been very positive about Discovery. Initially, the company’s shares did not appear to be high. Among the documents produced up to the spinoff and merger, Pro Pharma’s revenue for Warner Bros. Discovery was estimated at $ 45.53 billion. Although the company will generate a net loss of $ 3.01 billion, its EBITDA will be $ 10.85 billion. If EBITDA were used as a proxy for operating cash flow at a low interest rate, this measurement, in a pro form, would be approximately $ 8.26 billion on a default basis.
Currently, the business’s net debt stands at about $ 46.68 billion, while its current market capitalization is $ 59.45 billion. It has a net worth of $ 106.13 billion. Using the above estimates, Warner Bros. Discovery is trading at multiples of 7.2 and EV to EBITDA of 9.8. Comparing with other companies in this space is a bit challenging. For example, we only need to look at two companies to illustrate how difficult comparative evaluation can be. This would be one of the examples Netflix (NFLX). This Pure-Play Streamer has been performing well for the past several years. That being said, operating cash flows are random. EBITDA is a little easier to see though. Based on my calculations, this figure totals $ 18.63 billion last year. It stands for EV to EBITDA Multiple in 8.8 Company. Another player who performed very well in the streaming space Walt Disney Company (DIS). But it also operates as a diversified entertainment business with theme parks and other properties unrelated to streaming. It is still recovering from the Govt-19 infection, so I would not be correct to say that cash flow and EBITDA are normalized at this time. Nevertheless, the price for multiples of a company’s cash flow should be 47, while for EV to EBITDA multiples it should be 32.9.
Ignoring the comparative estimate, as a general rule, Warner Bros. The current folds of Discovery trading should be considered attractive. On top of that, although I do not expect the company’s HBO and HBO Max streaming operations to be as attractive anywhere as Disney and Netflix have, there is a clear path to adding value. In the final quarter of fiscal year 2020, HBO and HBO Max had 60.6 million global subscribers, of which 41.5 million were in the domestic market. By the end of 2021, that number had grown to 73.8 million and 46.8 million, respectively. AT&T estimates that by the end of 2025 there will be 120 million to 150 million subscribers on the platform. Deutsche Bank, meanwhile, estimates the service will reach 194 million by the end of 2026.
It should also be noted that Discovery seemed to be performing better before merging with WarnerMedia. Between 2017 and 2021, the company increased its revenue from $ 6.87 billion to $ 12.19 billion. This is despite revenue falling from $ 11.14 billion in 2019 to $ 10.67 billion in 2020. The company has a net profit of $ 1.01 billion last year, up from a net loss of $ 337 million in 2017. It is noteworthy that the year 2021 saw the decline in profits for the third year in a row. Operating liquidity has grown from $ 1.63 billion to $ 2.80 billion over the past five years, while this figure has increased from $ 3.52 billion to $ 6.04 billion, excluding changes in working capital. But again, the company has not fully recovered from the epidemic, and 2019 marks the year with more than those two measurements. For better or worse, investors in Warner Bros. Discovery should expect the same management that now controls some of these operations. Andy Forssell, President of HBO Max and Ann Sarnoff, Head of Studio / Networks Operations at WarnerMedia have both left the joint venture. This often leaves Discovery employees in charge of the business.
Investors should be pleased with the performance of AT&T and Warner Bros. Discovery. However, future volatility will occur just as it does for other businesses. Having said that, I believe there is still value in these two businesses. Although investors are eager by the growth prospects of Warner Bros. Discovery, I think there is still a strong value proposition with AT&T. That’s why I want to sell my stake in Warner Bros. Discovery and buy an additional stake in AT&T.