3 Reasons WMG is Risky and 1 Stock to Buy Instead

Warner Music Group currently trades at $29.22 per share and has shown little upside over the past six months, posting a small loss of 2.6%. The stock also fell short of the S&P 500’s 7.1% gain during that period.

Is there a buying opportunity in Warner Music Group, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Warner Music Group Will Underperform?

We don’t have much confidence in Warner Music Group. Here are three reasons why there are better opportunities than WMG, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Warner Music Group’s sales grew at a weak 8.6% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.

2. Free Cash Flow Projections Disappoint

Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts’ consensus estimates show they’re expecting Warner Music Group’s free cash flow margin of 10.2% for the last 12 months to remain the same.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Unfortunately, Warner Music Group’s ROIC averaged 2.4 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Warner Music Group doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 17.2× forward P/E (or $29.22 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.

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