Warner Music: Goldman Jacks Estimates and Target Price

Warner Music Group (WMG) reported a weak FQ2 last week, with revenue and EPS coming in at $800 million (ahead of $776 million consensus) and -$0.23 (behind -$0.13 consensus). The firm also cancelled its dividend in order to “build cash reserves” and “reduce net debt.” But this hasn’t deterred Goldman from jacking their estimates and price target. GS is raising its 6-month price target from $6.50 to $8.00 to reflect:

(1) the company’s intention to slow its overall level of investment as it believes that it has most of the pieces it needs in order to be a “360” music company; (2) the recorded music industry has stabilised, though it is still in decline; and (3) WMG continues to grow market share through its A&R efforts. The combination of slowing industry declines, continued market share improvements, and lower overall investment raises our cash flow and valuation estimates for WMG.

Shares remain rated Neutral and FY 2008, FY 2009, and FY 2010 EPS estimates move to -$0.27, -$0.23, and -$0.05 from -$0.30, -$0.25, and -$0.13 respectively.

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