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Contributors: Douglas McIntyre Jon C. Ogg

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Wednesday, August 02, 2006

How Much Bad News Is Priced Into Warner Music?

How much bad news is already priced in ahead of the Warner Music (WMG) earnings tomorrow morning? You have to ask yourself if anyone on the street is expecting much good news from the company.

EMI and Warner finally threw in the towel in their heated takeover battle. The reason was because of European Union regulators, but this makes you wonder what the company would be worth on its own. EMI in London made a $28.50 per share offer for its American rival in May. That was rejected by Warner, but Warner then tried to Buy EMI. The last bid from EMI of about $31 per share put Warner's valuation at about $4.6 billion. Warner's current market cap is $3.5 billion.

By now everyone on the street knows that a merger battle can greatly distract a company from its core operations. The street is expecting $785 million in revenues and expects EPS of -$0.19. The company's total revenues last quarter were about $796 million. We probably should be looking to next quarter with estimates at $0.01 EPS and revenues of about $916 million. With this being a throw away quarter and with the company having been in this fight at the end of the quarter, it may be safe to assume they will have a bummer report and maybe even bummer guidance. That often happens on merger implosions.

WMG was trading at roughly $30 last month's high, and shares are now down another 2.3% at $23.57 today. Institutions and individual investors are probably bracing for the worst. If the company somehow shows that business wasn't affected and that they are doing better than expected, then you'll probably get a pretty big relief rally.

WMG is currently in the middle of its $15.03 to $31.00 trading range seen in the last year and is well up from the $15 to $20 band it was in for the year after coming public.

Jon C. Ogg
August 2, 2006

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