Warner Bros. Discovery received stock upgrades from two media analyst firms Friday for, among other things, making the decision to tie bonuses for CEO David Zaslav and his team to free cash flow performance.
“We threw everything and the kitchen sink at a Downside Case scenario for WBD, and it still delevers to 3x by ’25E,” Wells Fargo analysts wrote in a research note published Friday, in which they upgraded WBD’s stock to “overweight” with a price target increase from $13 to $20 per share. “We now have conviction in FCF to limit downside, while the stock has asymmetric upside.”
Meanwhile, Wolfe Research moved WBD from its “peer perform” rating to “outperform” and also upped the price target to $20. (At time of publication Friday, WBD stock was trading at $14.51 per share.)
“Investors are rightly skeptical of media cash flow forecasts,” Wolfe’s Peter Supino wrote. “Media executives get paid for growth, and content growth requires working capital. At Warner Discovery, the executives get paid for free cash flow and debt paydowns. That’s why we expect them to deliver high (>50%) of EBITDA to free cash flow as merger-driven charges subside. We don’t assume revenue growth, but we do estimate 3.9x gross leverage by YE’23 (guide <4x) and 3.0x by YE’24 (guide 2.5-3.0x).”
For the fourth quarter of 2022, Warner Bros. Discovery competitors including Paramount, Disney and Fox all reported negative free cash slow, while WBD reported $3.3 billion free cash flow for the full year (the company does not break out free cash on a quarterly basis) exceeding its guidance of $3 billion.
On March 6, the company revealed a new free-cash-flow-based plan for handing out bonuses at the highest level, meaning the top priority for the top people at the company based on financial incentive alone should now, theoretically, be reducing debt.
“WBD announced recently it’s tweaking exec pay by linking bonus payouts with key near-term financial objectives,” Wells Fargo noted. “WBD’s top execs, including CEO David Zaslav, will now have comp packages in the form of performance stock units (PRSUs) based on their success in generating FCF and helping reduce debt to align incentives with management’s top priorities. WBD has set aside $27mm in PRSUs for WBD’s execs + $15mm in RSUs for other employees to improve retention efforts. We see deleveraging as the #1 management incentive and the #1 investor priority.”