2023-10-26 09:00:00 ET
Summary
- Universal Music Group and Warner Music Group are two of the biggest music labels in the world.
- Better Management and Market position are the two main reasons I bought UMG over WMG.
- UMG's CEO, Lucian Grainge, has deep industry knowledge and experience.
- The company has a better music catalog and artists enabling a dominant market position.
Introduction
Music is a must-have for so many people around the world. It is universal and recurring. Music labels offer a royalty on people listening to music. So naturally, I had to invest in it. Universal Music Group ( UMGNF ) and Warner Music Group ( WMG ) are the two biggest music labels that are publicly traded. I have previously posted two write-ups about UMG. I am a shareholder through the stock listed on the Amsterdam exchange (UMG.AS). In this write-up, I will list two reasons for buying UMG rather than WMG.
CEO
When it comes to music labels, management is a much more crucial element than your average company. It either makes or breaks the label, and I will explain why. Artists are the bedrock on which the label is built. If you don't have a management team that is good at spotting talent and signing new artists, your label will potentially go under.
UMG's current CEO is Sir Lucian Grainge. He has been with the company since 1986 and was appointed CEO in 2011. His contract doesn't expire until 2028 . Under Mr. Grainge's leadership, the firm has been able to innovate and shift from mainly deriving revenue from CDs (physical) to streaming, compounding revenue at a CAGR of 8% despite music piracy in the early 2010s. These results wouldn’t have been possible without key signings and spotting new talent. UMG has hit an all-time high in revenue since 2015. Mr. Grainge is also compensated in a way that benefits shareholders, with half of his salary coming from equity and stock options.
As for WMG, on January 1st, 2023, the company appointed Robert Kyncl as its CEO. Before that, Mr. Kyncl spent 12 years at YouTube, where he served as Chief Business Officer. He helped develop and expand YouTube's creator, as well as the launch and growth of YouTube Music, YouTube Premium, and YouTube TV. I think it is too early to judge Mr. Kyncl on his performance at the company, but as of the last quarter, revenue is up by 10% and EBITDA margin by 97 bps year-over-year. So far, WMG seems to be heading in the right direction under his leadership.
By the looks of it, Mr. Grainge has more experience, industry knowledge and has signed more artists. He has been able to deploy capital effectively, with a five-year average ROIC of 24% and 5.53% for WMG. I don't want to judge Mr. Kyncl too early because it hasn't even been a year since he was appointed CEO, but for now, Mr. Grainge is my pick.
Market Position
Turning to market positioning, Universal Music Group is at the #1 spot in recorded music, while WMG is #3. As for music publishing, UMG is #2, and WMG is #3. Although UMG isn't at #1 in the other segment, most music labels' revenue is derived from recorded music, which includes streaming, licensing, downloading, and more. 76% of UMG's revenue is derived from recorded music and 84% from WMG .
Given UMG's music catalog, it should come as no surprise that they are #1. In 2022, the company had 4 of the top 5 artists. These four artists together have 320 million listeners on Spotify ( SPOT ) as of the time of this writing. Two of them, Taylor Swift and The Weekend, have 100.5 million and 105.2 million, respectively. As of 1H 23, UMG had four of the top five albums in the U.S. and six of the top 10 in the U.K.
Created by the author using Statista
On the other hand, WMG has notable artists such as Pitbull, Ed Shareen, Jason Derulo, and more. But this comes nowhere near the scale of UMG. The firm has almost double the revenue and EBITDA. I believe UMG will be able to keep its dominant position within the industry due to management's deep knowledge of how the business works, and they can also leverage their current signings to attract new ones.
Additionally, Gen Z is the largest consumer of music, and their favorite genre is pop. UMG has three of the top five pop artists in the world, including #1 Taylor Swift. In my view, it's safe to assume that the company's catalogs will still be listened to 10 years down the line, given that the age range of Gen Z is 11–26.
Valuation
UMG is trading at a forward PE of 28.6x the FY23 consensus of $0.89 and 25.4x the FY2024 consensus of $1.02. On a trailing free cash flow basis, the stock yields over 3.6% relative to its enterprise value.
WMG is trading at a forward PE of 32.1x the FY23 consensus of $0.98 and 23.8x the FY2024 consensus of $1.36. On a trailing free cash flow basis, the stock yields over 3.6% relative to its enterprise value.
Mitigates
Although I classify UMG as a relatively safe business due to the low cost of music and high demand, I believe there are still some associated risks. First is the failure to attract new talent because, as I said before, Music labels can't thrive without new artists, which leads me to my second point, a change in management and perhaps Mr. Grainge stepping down as CEO. His contract doesn't end until 2028.
Wrap-Up
The bottom line is that UMG is the leading music label in the world, underpinned by a top-tier management team. Before I invest in a company, I have a checklist. Two items on that list are whether the company has a dominant position and is management top-tier. UMG checks both boxes along with others, such as long-term growth prospects, capital light, and a strong moat.
For further details see:
2 Reasons I Bought Universal Music Group Over Warner Music Group