Chart: Eurozone PMI — jobs are starting to be cut…the US outlook continues to diverge from EUR
NZ/AUS
Xero shares are currently down -8% after posting its half-year result, despite turning a minor profit of $54m – the company is still in its heavily invested growth phase. Operating revenue rose +20% from last year to $800m, which wasn’t enough to keep investors happy. Xero‘s subscriber base grew +13% from last year, to 3.945m with the company benefitting from a +6% increase in average revenue per user. We still view Xero as a quality tech stock with plenty of growth ahead and remain BUY rated especially below $110 per share.
Mainfreight shares are up +8% after delivering its half-year result which was weak compared to the previous period but heavily flagged and expected by the market. Compared to peers the result held up better with falling freight volume and pricing softening – proving the quality of the company and managements operation. We did highlight we thought it was oversold, and what is encouraging is that the company expects the second half to be better than the first. We still anticipate some weakness in market conditions over the horizon but the quality of the stock means its still good buying at these levels heading into the next cycle. What other CEO lists their number in the results on the NZX…Don Braid is a class act.
The WBD Blame Game
The story of WarnerBrothersDiscovery (WBD)has been told before but a quick primer for those new here — WBD is the alien spawn of AT&T and Discovery, inc — AT&T being the massive telco and Discovery being the makers of high-brow content like “Ice Road Truckers” and “Storage Wars” (won’t lie, we love a bit of Storage Wars). AT&T bought WarnerMedia in 2018; before that WarnerMedia was called AOLTimeWarner (still with us?) when the media company merged with America Online. Nobody is on AOL anymore. Nobody is using AskJeeves. The AOLTimeWarner thing was a complete disaster — it was valued at $350bn! AOL now is worth, approximately, zero dollars, and WarnerBrothersDiscovery — the entity that eventually was summoned from the corporate hocus pocus – is worth about $22bn. For reference, AT&T bought WarnerMedia for about $88bn. So, it’s a lot less money. Either way you cut it.
Happier times — Steve Case and Jerry Levin floating AOLTimeWarner
Now, Discovery was controlled mostly by John Malone (Al Gore called him the Darth Vader of cable) and Malone still have a big stake in the new company. When Discovery merged with WarnerMedia they made David Zaslav CEO, who was previously the CEO of Discovery. Mostly because of Malone — the dude has tentacles everywhere, and Zaslav is “his man”.
You might say — this is all very well and good — but so what? Well, for one, Zaslav is not a Hollywood kind of person. He is a Storage Wars kind of person. Hollywood doesn’t really like Zaslav. He’s cut $12bn in debt — needed, because the company was loaded with debt like the sloppy fries you get at Wendy’s. He’s also cut things like the Batgirl movie (a tax write-off), a bunch of costs at CNN, staff, HBO shows — he’s kind of going on a spree of cutting costs. Hollywood doesn’t like that. Shareholders did, until today, where the stock dropped 19%.
Like — 19% of the stock’s value! Eroded within a day! Why did this happen? The biggest thing — the debt to adjusted income ratio target, which was 2.5-3.0x, is now deemed unfeasible. Translation: they can’t cut much else. The other thing Zaslav said was “we’re in an era of generational change”.
Well — of course. The TV ad model doesn’t work anymore. It worked well for a long time. Now it isn’t. But “generational change” feels a little like a cop-out. We all know that streaming is here. It’s kind of like the Western Union incredulously saying we’re going through “generational change” with the telephone in 1950. “What’s wrong with the telegraph?!”
So — a few questions. The first is whether Zaslav is the right person to keep leading WBD. He isn’t well liked. Hollywood is a people business. He was perhaps the right person to act as the hatchet man, cutting costs like Patrick Bateman in American Psycho. But now there is the question of performance — CNN has been disappointing, with Chris Licht coming-and-going, and HBO’s much vaunted The Idol ended up being cancelled. Meanwhile, the DC universe fails to pop. The second is what does the future of WBD look like? It’s got all these assets — CNN, Warner Bros, DC, Discovery, HBO — how does it capitalise upon them? Malone is the de-facto power behind the throne, and he doesn’t suffer fools gladly — heads may roll.
Here’s why we still like WBD, though — the streaming unit actually made a profit — $111mn. That’s not bad, with about 95mn subscribers worldwide. We also think the movie segment deserves a look — Barbie pulled in $1.5bn worldwide. There’s some good parts, there, but the overall business is marred by its pile of debt (on the bright side, all that debt is fixed interest, at least). But more work is needed — an adj. lost of ~$400mn isn’t exactly good news, but it isn’t bad news either.
Meanwhile, Disney reported EPS of 0.80c per share — well ahead of Wall Street’s expectations. Streaming service saw a ~$387mn loss, while it gained another 7mn subscribers. Signs of a turnaround — we wrote recently about the company’s tough time, and it looks like there’s some kind of light on the horizon. Remaining buy on both.