EDR - Endeavor Group: Murky Outlook (Rating Downgrade)

2023-08-31 14:45:43 ET

Summary

• EDR's Q2 2023 results beat expectations, but the company's shares have been range-bound since then.
• The current strikes involving actors and writers have resulted in Endeavor Group withdrawing its prior full-year 2023 financial guidance.
• I downgrade my rating for Endeavor Group to a Hold, as there is substantial uncertainty over EDR's 2H 2023 performance in view of ongoing strikes.

Elevator Pitch

I have a hold rating assigned to Endeavor Group Holdings, Inc. ( EDR ) shares.

I previously drew attention to the proposed merger between World Wrestling Entertainment, Inc. ( WWE ) and EDR's Ultimate Fighting Championship or UFC business and the company's capital return initiatives with my earlier June 16, 2023 write-up .

Endeavor Group's near-term prospects have become more uncertain because of ongoing strikes by screenwriters and actors, and this is the key reason for downgrading my rating for EDR to a hold . A sell rating for EDR isn't warranted, as the stock is trading at reasonable valuations.

EDR's Shares Have Been Range-Bound In The Past 3 Weeks Post-Results

Endeavor Group's stock price jumped by +6.2% from $23.58 as of August 8, 2023 to close at $25.03 at the end of the August 9 trading day. But EDR's positive share price momentum post-earnings wasn't sustainable. The company's last traded share price of $24.15 as of August 30 was slightly higher than its pre-results release stock price of $23.58, which meant that Endeavor Group subsequently gave up most of its post-results share price gains. For the last couple of weeks, EDR's shares were stuck in the $23.66-$25.50 trading range .

Initially, the market reacted well to EDR's better-than-expected Q2 2023 financial results announced on August 8 after trading hours. Endeavor Group's actual second quarter topline and normalized EBITDA came in +1.3% and +1.9% above the Wall Street analysts' respective financial projections, based on financial data taken from S&P Capital IQ . EDR noted at the company's Q2 2023 earnings briefing on August 8 that its financial performance was "solid" thanks to "ongoing demand for premium content and live events."

While the company's recent second quarter results were pretty decent, investors are turning their attention to uncertainty regarding Endeavor Group's near-term prospects, which are detailed in the next section. This helps to explain why EDR's shares didn't continue to rise in the subsequent weeks following its Q2 2023 results disclosure.

Strikes Led To Withdrawal Of Fiscal 2023 Guidance

EDR withdrew its earlier full-year FY 2023 guidance when it reported its Q2 2023 financial results.

In early May, Endeavor Group had previously expected the company's topline and normalized EBITDA to expand by +9.0% and +7.3% to $5.740 billion and $1.248 billion, respectively for the current fiscal year as per the mid-point of its prior guidance.

As it stands now, the sell side is projecting that EDR's revenue will increase by +7.2% to $5,648 million for FY 2023 and forecasting that the company's normalized EBITDA contract by -2.9% to $1,130 million in this fiscal year as per S&P Capital IQ's consensus data. Endeavor Group's current consensus FY 2023 topline and EBITDA estimates are significantly lower than EDR's prior full-year financial guidance for good reasons.

At its second quarter results call in early August, Endeavor Group stressed that "this is the first time in 63 years, both WGA and SAG-AFTRA are striking simultaneously", which makes it "premature to speculate the aggregate dollar impact for the balance of" 2023. WGA and SAG-AFTRA refer to Writers Guild of America and The Screen Actors Guild and American Federation of Television and Radio Artists, respectively.

In specific quantitative terms, EDR thinks that it could possibly suffer from a loss of revenue amounting to $25 million for every month that the strikes persist. Given the high fixed cost nature of EDR's business, the hit to Endeavor Group's monthly EBITDA during the time of strikes might be pretty close to $25 million as a result of negative operating leverage.

At the time of writing, there is no indication that the strikes will end anytime soon based on recent news flow . As such, the outlook for Endeavor Group in the short term is murky.

A review of EDR's consensus FY 2023 numbers highlighted above indicates that the analysts are essentially writing off the second half of this year when it comes to assessing the impact of the strikes on the company. If the strikes end in late Q3 or the early part of Q4 this year, the sell-side might rush to revise their financial forecasts for EDR upwards. On the flip side, assuming that the strikes only conclude towards the end of 2023 or even in early 2024 in the worst case, there could be another round of cuts in earnings estimates and price targets for Endeavor Group.

Valuations And Share Repurchases

The market currently values Endeavor Group at 1.1 times consensus forward fiscal 2024 price-to-revenue and 7.1 times consensus forward FY 2024 EV/EBITDA (Source: S&P Capital IQ ), which I deem to be undemanding.

Separately, EDR disclosed at its Q2 2023 earnings call that it plans to start its "share repurchase of up to $300 million (worth) of Class A common stock" in August 2023.

In a nutshell, EDR's shares aren't trading at very rich valuations, and the company will likely be executing on a significant share buyback plan soon. Therefore, there should be downside support for Endeavor stock for the short term.

Concluding Thoughts

There is no certainty as to when the current strikes involving actors and screenwriters will stop. As there is little visibility regarding Endeavor Group's 2H 2023 performance, it makes sense to have a neutral view on the stock for now.

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