Mario Gabelli (Trades, Portfolio) is a legendary value investor who founded GAMCO investors, an investment firm that reported ~$9.28 billion worth of stocks in its 13F filing for the fourth quarter of 2022. Gabelli’s investment strategy focuses on “bottom-up” analysis of stocks as opposed to “top-down” macroeconomic investment methods. His investment strategy aims to look for asset mispricing, aka value investing opportunities. In prior interviews, Gabelli has also mentioned his preference to identify a “catalyst” and considers himself an expert in the media industry.
Thus, in this article, I'm going to dive into two stocks Gabelli's firm was buying in the fourth quarter of 2022, one of which is a media stock, his area of expertise; let’s dive in.
1. Warner Music Group Corp
Warner Music Group Corp. (WMG, Financial) is one of the “big three” leading music publishers in the world, along with Sony Group (SONY, Financial) and Universal Music Group (XAMS:UMG, Financial). Popular artists signed to Warner Music include Ed Sheeran, Beyonce, Coldplay, Madonna, Metallic, Red Hot Chili Peppers and many more. Warner Music even has the rights to music by the late Whitney Houston.
This elite list of artists effectively acts as a “moat” for Warner Music, as any time songs by these artists are purchased or streamed online, Warner Music gets a slice of the action. Warner Music also gets a cut of the royalty fees if music is used in television shows, movies or advertisements.
Mixed financial results
Warner Music reported mixed financial results for the first quarter of its fiscal year 2023. Its revenue was $1.49 billion, which missed analyst expectations by $31.22 million and declined by 7.81% year over year.
This may seem terrible at first glance, but it should be noted that last quarter's financials included an extra week which, when adjusted for, resulted in a 2% increase in revenue according to management in its earnings call.
Breaking revenue down by segment, its recorded music segment revenue fell by 5.6%, which was approximately flat when adjusted for the extra week.
Streaming providers likely are not going anywhere. If you think back to just a couple of decades ago, do you remember how expensive and inefficient consuming music was? An individual would need to go to a store and then pay $10 for a CD which had 10 songs. These days you can pay $10 per month and get access to over 70 million songs on Spotify (SPOT, Financial). Now although the fact music costs less than it used to will impact the revenue of publishers, I believe more music can be consumed more easily, which has to be a positive for the industry thanks to more customers.
In fact, Warner Music reported a 16% increase in its digital revenue, which was driven by streaming growth. In addition, the company reported a 17% increase in its licensing revenue which was driven by higher broadcast fees and third-party licensing. This was slightly offset by a decline in the cyclical advertising market.
Its earnings per share was $0.23, which missed analyst expectations by $0.03. A positive is the company has $736 million in cash and short-term investments on its balance sheet. The business does have fairly high debt of $4.1 billion, but the vast majority of this, ~$3.1 billion, is long-term debt and thus manageable.
Valuation and guru investors
Warner Music trades at a price-earnings ratio of 32 on both a GAAP and a non-GAAP basis. This is ~29% cheaper than its five-year average.
The company also trades at a price-sales ratio of 2.84, which is close to 17% cheaper than its five-year average.
The GF Value chart indicates a fair value of $38 per share, and thus the stock is “modestly undervalued” at the time of writing.
Mario Gabelli (Trades, Portfolio) took a new stake of 74,250 shares in the stock in the fourth quarter of 2022, during which shares traded at an average price of $29.15.
Ray Dalio (Trades, Portfolio) of Bridgewater Associates also added to his position in the quarter, and so did Steven Cohen (Trades, Portfolio).
2. Intuit Inc.
Intuit Inc. (INTU, Financial) is a software company that specializes in the accounting and financial reporting market. The company is most well known for its “Quickbooks” platform and has a staggering 82% market share in the SMB accounting software market, according to Slintel data.
According to the company, its total addressable market (TAM) across its core product range is $81 billion. As the company continues its aggressive international expansion plans, it estimates its revenue could eventually grow as high as $312 billion.
Growing financials
The company reported solid financial results for the second quarter of its fiscal year 2023. Its revenue was $3.04 billion, which surpassed analyst forecasts by $129 million and rose by a solid 13.77% year over year.
I wasn’t surprised to see continued growth in its product revenue, as companies must legally file accounts (Quickbooks) and taxes (Turbotax) no matter what the economic conditions.
The company has also continued to produce strong profitability with earnings per share of $0.60 in the quarter, which surpassed analyst forecasts by $0.83. Its operating income was an exceptional $3 billion in the quarter, which increased by close to 14% year over year.
The business also has a strong balance sheet with $2.1 billion in cash and short-term investments. It does have fairly high debt of ~$7.1 billion, but the vast majority of this is long-term debt ($6.5 billion).
Valuation and guru investors
Intuit trades at a forward price-earnigns ratio of 29 on a non-GAAP basis, which is 21% cheaper than its five-year average, though its trailing 12-month GAAP price-earnings ratio of 58.51 is less inspiring.
Its price-sales ratio is 8.44, which is ~23% cheaper than its five-year average, while its enterprise-value-to-Ebitda ratio is ~22, which is over 19% cheaper than its five-year average.
The GF Value chart indicates a fair value of $571 per share and thus the stock is “modestly undervalued” at the time of writing.
Mario Gabelli (Trades, Portfolio) purchased 6,954 shares of the stock in the fourth quarter, during which shares traded at an average price of ~$396.96.
Growth stock investors Ron Baron (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) also purchased shares of the stock in the fourth quarter.
Final thoughts
Both Warner Music and Intuit are two very different but strong companies. Warner Music has an extensive catalog of music rights from leading artists which acts as a competitive advantage. The business’ financials have been impacted by headwinds related to music-based advertising. However, a positive is streaming is still a growing industry. Intuit on the other hand has a strong and dominant market position in the accounting software industry. The company has continued to execute exceptionally, beating both revenue and earnings growth estimates. Therefore out of the two stocks, I like Intuit better.
