With Hollywood writers on strike, delays in producing fresh content, and other challenges disrupting the entertainment industry, investors could wait for a better entry point in Warner Music Group Corp. (WMG). Moreover, considering its bleak financials, I think AMC Entertainment Holdings, Inc. (AMC) might be best avoided.
Before delving into the stocks’ discussion, let us look at how the strike affects the entertainment industry.
Hollywood’s writers have been on strike since May 2, 2023. The main highlights currently dividing the Writers Guild of America (WGA) and the Alliance of Motion Picture and Television Producers (AMPTP) include streaming, where transparency in viewership data and residual payments are key points of contention.
Additionally, concerns about artificial intelligence-generated scripts and the evolving structure of writers’ rooms in the industry further complicate negotiations. The strike also disrupts the production of new content for television and film, leading to delays in releasing new shows and movies. It can affect the entertainment industry’s ability to meet the growing demand for fresh and engaging content, particularly from streaming platforms.
Moreover, the strike’s ripple effects extend beyond just the writers and actors. It affects various professionals in the entertainment ecosystem, from crew members to post-production staff and even local businesses that rely on the entertainment industry.
Also, persistent inflation and increasing interest rates have greatly influenced consumer spending patterns, prioritizing essential expenses over discretionary ones. These economic challenges have, in turn, led to higher production costs, reduced advertising income, and substantial value losses for entertainment and media companies over the past year.
Given the industry headwinds, it’s time to examine the fundamentals of the stocks in the Entertainment – Movies/Studios industry, starting with the stock to sell.
Stock to Sell:
AMC Entertainment Holdings, Inc. (AMC)
AMC engages in the theatrical exhibition business. The company owns, operates, and has interests in approximately 950 theaters and 10,500 screens worldwide.
AMC’s forward EV/Sales and EV/EBITDA multiples of 2.39 and 27.56 are 31.8% and 223.6% higher than the industry averages of 1.82 and 8.52.
AMC’s trailing-12-month gross profit margin of 10.74% is 78.3% lower than the industry average of 49.37%. Its trailing-12-month negative EBIT margin of 5.33% compares to the industry average of 8.50%.
AMC’s revenues for the fiscal second quarter that ended June 30, 2023, stood at $1.35 billion. Its operating costs and expenses increased 6.8% year-over-year to $1.26 billion. The company’s adjusted net loss stood at $6.60 million.
Street expects AMC’s EPS to come at negative $0.34 for the fiscal year ending December 2023. Its revenue is expected to reach $4.66 billion in the same year.
The stock has lost 82.7% over the past year to close the last trading session at $13.70. It has fallen 69.9% over the past month.
AMC’s POWR Ratings reflect its bleak fundamentals. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
It has an F grade for Stability and a D for Quality. It is ranked last among the six stocks in the Entertainment – Movies/Studios industry.
Beyond what is stated above, we’ve also rated AMC for Growth, Momentum, Value, and Sentiment. Get all AMC ratings here.
Stock to Hold:
Warner Music Group Corp. (WMG)
WMG operates as a music entertainment company in the United States, the United Kingdom, Germany, and internationally. It operates through Recorded Music and Music Publishing segments.
WMG’s forward EV/Sales and EV/EBITDA of 3.48x and 16.78x are 91.7% and 97% higher than the industry averages of 1.82x and 8.52x.
While WMG’s trailing-12-month gross profit margin of 47.36% is 4.1% lower than the industry average of 49.37%, its trailing-12-month EBIT margin of 12.74% is 49.9% higher than the industry average of 8.50%.
On July 18, 2023, WMG and TikTok announced a groundbreaking partnership aimed at benefiting WMG’s artists and songwriters, as well as TikTok’s vast global user base exceeding a billion users.
This multi-year, multi-product agreement encompasses licensing the music catalog of Warner Recorded Music and Warner Chappell Music for use on TikTok, TikTok Music, CapCut, and TikTok’s Commercial Music Library.
On September 1, WMG paid a regular quarterly cash dividend of $0.17 per share on WMG’s Class A and Class B Common Stock.
The company pays an annual dividend of $0.68, which translates to a yield of 2.02% on the current price level, higher than its four-year average dividend yield of 1.44%.
For the fiscal second quarter that ended June 30, 2023, WMG’s revenues increased 9% year-over-year to $1.56 billion. Its adjusted operating income was $146 million, rising 25.6% year-over-year.
However, its adjusted net income declined 1% year-over-year to $146 million, and its free cash flow decreased 12% from the previous-year quarter to $113 million.
Analysts expect WMG’s revenue to rise 6.4% year-over-year to $1.59 billion in the fiscal fourth quarter ending September 2023. However, its EPS is expected to fall 15.1% year-over-year to $0.27 in the current quarter.
While the stock plummeted 3.9% year-to-date, it has soared 23.6% over the past year, closing the last trading session at $33.65.
WMG’s POWR Ratings reflect its mixed fundamentals. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.
The stock has a C grade for Growth, Stability, and Quality. It is ranked #4 in the same industry.
In addition to the POWR Ratings stated above, one can also access WMG’s additional ratings for Momentum, Sentiment, and Value here.
What To Do Next?
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WMG shares were trading at $33.65 per share on Monday morning, up $0.35 (+1.05%). Year-to-date, WMG has declined -2.33%, versus a 18.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...
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