Is Warner Bros Discovery stock a buy right now? How does WBD stock compare to Disney stock's valuation? Today we’ll look into Warner Bros Discovery's cash flow, debt burden and valuation. 🔥 Combined, the debt of the merged company will total 58B. Upon closing, the net debt to EBITDA will be between 4-5X, previously guided to be 5X. This leverage, in most circumstances, would represent a major burden on the company. But, as I mentioned previously, their 2022 expected FCF to EV yield is also incredibly high at 10%, which will be more than sufficient to serve their debt. The market seems to be pricing in bankruptcy risk, but as we can see from the FCF yield, that’s completely off the table. Their cost of debt is nowhere near 10%.

Management is planning on sharply deleveraging in the 24 months following the merger, going from 4-5X to 3X leverage. How will this be possible? The company guided total synergies post merger of $3B.  Additionally, the FCF conversion is expected to be 60% due to their overseas growth. Finally, they are lowering the barriers to entry on their DTC product by being the first to market with a hybrid ad-subscription model. Historically, management has a strong track record of paying their debt and sticking to their guidance.   In less than two years, Disney’s EV/EBITDA went from the low 10’s to above 60… and with the recent stock market correction, it has come down to just below 25. The increase here can in large part be attributed solely to Disney+.   

In comparison, despite the Discovery+ announcement in December 2020, DISCA’s EV/EBITDA multiple has stayed relatively flat, slightly even decreasing over the past 5 years, reflecting the company’s stagnant stock price alongside its increasing profitability, meaning that the stock is getting cheaper.

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