What's the beat?

Street eyeing Warner Music shares

With Warner Music Group shares recently hitting a new 52-week low following a quarterly earnings report that disappointed some, Wall Street observers have naturally been discussing whether the stock has dropped far enough to be a "buy."

Citigroup analyst Jason Bazinet, for one, believes it has. He upgraded WMG shares to a "buy" and boosted his price target by $3 to $13 following the firm's recent fiscal third-quarter results.

"With more realistic investor expectations coupled with the recent sell-off in the shares, we think shares of WMG are undervalued," he wrote in a report.

The adjustment came as a slight reversal after Bazinet at the very start of the month had cut his price target on WMG from $19. "Our then new target was based on our view with an accelerating slump in fundamentals — coupled with respectable results from rivals — Warner was likely to materially miss consensus estimates" for the latest quarter, according to the analyst.

But while WMG did miss those quarterly consensus estimates, "the results were better than we expected," Bazinet concluded.

Meanwhile, Goldman Sachs analyst Anthony Noto had a different take on the latest WMG financials, lowering his financial estimates for the company's full fiscal year and cutting his price target to $12 "to reflect continued physical music softness and digital growth that has trailed the market over the last few quarters."

Overall, he maintained his "neutral" rating on the stock, citing "the complete lack of visibility into WMG's growth and the challenge in calling a bottom in physical music declines."

Noto also made a call on the much-debated question of whether digital music sales can save the industry. "It's clear the secular challenges are too great for digital revenue growth to outpace physical music declines," he said. "New devices, such as the iPhone, will speed the transition to digital distribution, but revenue growth for the overall industry will require an increased value proposition for consumers, which may take a prolonged period of time."

Will all this make it more likely that the last publicly traded independent music major will in the end go private after recently falling below the $10 mark?

Some have suggested so, and UBS analyst Ian Whittaker believes there could be advantages to such a move. "It would make it easier to buy or merge with EMI's recorded music assets" down the line, he said.
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