The Communications Services sector of the S&P 500 is a mixed bag of companies growing revenue quickly and others with business models that are mature or undergoing transformation. Some of the latter have been crushed this year, but that could underline opportunities for 2024.
For example, on Nov. 8, Warner Bros. Discovery Inc.
WBD
Chief Financial Officer Gunnar Wiedenfels warned during an earnings conference call that the company was unlikely to reach its debt-reduction goal by the end of 2024 “without a meaningful recovery of the TV ad market,” according to a transcript provided by FactSet. The stock fell 19% that day.
It didn’t help that WBD reported that its total number of direct-to-consumer subscribers was down 700,000 during the third quarter to 95.1 million. Gimme Credit analyst David Novosel called that decline “shocking,” but pointed out that WBD had cut its debt by $4.2 billion so far in 2023. He concluded his note about WBD to clients on Nov. 9 with this comment: “Leverage is high and consequently debt reduction is a priority with its steady free cash flow.”
Industry developments haven’t been all bad for WBD or its competing content creators and streamers: The Hollywood actors’ strike ended on Thursday.
Warner Bros. Discovery took its present form in April 2022, when AT&T Inc.
T
divested WarnerMedia, which was merged with Discovery Inc. Since the renamed Discovery was the surviving company, FactSet has a long history for the performance of WBD’s stock. Even with the rough recent patch, WBD’s shares have risen 4% this year. Then again, the shares fell 60% in 2022.
Last week Mark Hulbert pointed out that one year’s set of dogs in the stock market can include the following year’s leaders.
Before looking at some screens of the Communications Services sector, take a look at how the 11 sectors of the S&P 500
have performed so far this year, with dividends reinvested. The table also shows current forward price-to-earnings ratios for the sectors and their relative levels to long-term average valuations:
| Sector or index | 2023 return | 2022 return | Return since end of 2021 | Forward P/E | Current P/E to 5-year average | Current P/E to 10-year average | Current P/E to 15-year average |
| Information Technology | 47% | -28% | 6% | 26.2 | 117% | 140% | 157% |
| Communication Services | 47% | -40% | -12% | 16.7 | 88% | 88% | 96% |
| Consumer Discretionary | 29% | -37% | -19% | 24.1 | 79% | 94% | 108% |
| Industrials | 6% | -5% | 0% | 17.6 | 89% | 97% | 106% |
| Materials | 1% | -12% | -11% | 17.2 | 101% | 105% | 112% |
| Financials | 0% | -11% | -10% | 13.1 | 89% | 93% | 99% |
| Energy | -2% | 66% | 63% | 10.6 | 96% | 56% | 65% |
| Consumer Staples | -4% | -1% | -5% | 18.7 | 94% | 97% | 106% |
| Real Estate | -5% | -26% | -30% | 15.5 | 78% | 82% | 83% |
| Health Care | -5% | -2% | -7% | 16.9 | 103% | 103% | 114% |
| Utilities | -13% | 2% | -12% | 15.2 | 83% | 87% | 96% |
| S&P 500 | 17% | -18% | -5% | 18.4 | 96% | 103% | 114% |
| Source: FactSet | |||||||
You might be surprised to see how well the Communications Sector has performed this year, but keep in mind that stocks in the S&P 500 are weighted by market capitalization — an effect that is magnified within the sectors. The best performers in the sector this year have been the three largest, by market cap: Alphabet Inc.
GOOGL,
which has returned 50%; Meta Platforms Inc.
META,
up 174%; and Netflix Inc.
NFLX,
which has gained 51%. Together, these companies make up 54% of the Communication Services Select Sector SPDR Fund
,
which is designed to mirror the performance of this S&P sector by holding all its stocks.
Some of the sectors trade high when compared with their long-term forward P/E averages, but the Communications Services sector isn’t among them.
Screening the S&P 500 Communications Services sector
Before looking at which stocks in the sector are most favored by analysts, we need to address what was on investors’ minds last week: debt. High levels of debt frighten investors, especially when interest rates are high. One reason AT&T was so bent on shedding its WarnerMedia unit was all the dent it took on when these assets were acquired in 2018. Much of this debt is now on WBD’s books. The company provided this convenient schedule of its long-term bonds last week, as part of its earnings release. You can see all related documents here.
There are only 19 stocks in the S&P 500 communications services sector. Here they are, ranked by total debt to estimated earnings before interest and taxes (EBIT) for the next 12 months:
| Company | Ticker | Debt/ est. EBIT | Total debt | Estimated EBIT | Debt service ratio | 2023 return | Market cap. ($mil) |
| Warner Bros. Discovery Inc. Series A | WBD | 2,215% | $44,800 | $2,022 | 23% | 4% | $24,117 |
| Paramount Global Class B | PARA | 877% | $17,297 | $1,973 | 103% | -28% | $7,328 |
| Charter Communications Inc. Class A | CHTR | 732% | $98,090 | $13,404 | 88% | 20% | $60,116 |
| Live Nation Entertainment Inc. | LYV | 678% | $8,421 | $1,242 | 215% | 26% | $20,186 |
| T-Mobile US Inc. | TMUS | 633% | $113,898 | $17,998 | 41% | 5% | $170,245 |
| AT&T Inc. | T | 621% | $159,271 | $25,660 | 39% | -10% | $111,397 |
| Verizon Communications Inc. | VZ | 560% | $172,070 | $30,728 | 41% | -2% | $150,591 |
| News Corp Class A | NWSA | 449% | $4,158 | $926 | 110% | 14% | $7,796 |
| Comcast Corp. Class A | CMCSA | 413% | $102,503 | $24,795 | 70% | 22% | $166,609 |
| Fox Corp. Class A | FOXA | 340% | $8,189 | $2,411 | 55% | -1% | $7,404 |
| Walt Disney Co. | DIS | 309% | $46,431 | $15,035 | 43% | 3% | $163,655 |
| Interpublic Group of Cos. Inc. | IPG | 305% | $4,693 | $1,538 | 64% | -11% | $11,004 |
| Match Group Inc. | MTCH | 303% | $3,841 | $1,267 | 603% | -30% | $7,915 |
| Omnicom Group Inc | OMC | 277% | $6,415 | $2,313 | 825% | -5% | $14,986 |
| Take-Two Interactive Software Inc. | TTWO | 264% | $3,515 | $1,329 | -80% | 44% | $25,525 |
| Netflix Inc. | NFLX | 200% | $16,764 | $8,396 | 201% | 51% | $194,601 |
| Electronic Arts Inc. | EA | 78% | $1,951 | $2,492 | 440% | 9% | $35,686 |
| Meta Platforms Inc. Class A | META | 69% | $36,852 | $53,439 | 853% | 174% | $730,672 |
| Alphabet Inc. Class A | GOOGL | 30% | $29,446 | $96,561 | 654% | 50% | $781,709 |
| Source: FactSet | |||||||
Click on the tickers for more about each company, including news coverage, business profiles, financials and estimates.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The debt figures are as of the end of the companies’ most recently reported fiscal quarters. The debt-service ratios are EBIT divided by total interest paid (excluding capitalized interest) for the most recently reported quarters, as calculated by FactSet. It is best to see this number above 100%. Also note that these service ratios cover only one quarter.
Now let’s see which of these stocks analysts working for brokerage firms like the most. The list is sorted percentage of buy ratings among analysts polled by FactSet:
| Company | Ticker | Share “buy” ratings | Share neutral ratings | Share “sell” ratings | Nov. 13 price | Consensus price target | Implied 12-month upside potential |
| T-Mobile US Inc. | TMUS | 90% | 7% | 3% | $147.21 | $177.71 | 21% |
| Meta Platforms Inc. Class A | META | 84% | 13% | 3% | $329.19 | $376.43 | 14% |
| Alphabet Inc. Class A | GOOGL | 82% | 18% | 0% | $132.09 | $152.69 | 16% |
| Take-Two Interactive Software Inc. | TTWO | 81% | 15% | 4% | $150.09 | $162.99 | 9% |
| Live Nation Entertainment Inc. | LYV | 79% | 16% | 5% | $87.64 | $111.24 | 27% |
| Walt Disney Co. | DIS | 76% | 18% | 6% | $89.44 | $104.21 | 17% |
| Match Group Inc. | MTCH | 68% | 32% | 0% | $29.12 | $43.41 | 49% |
| Warner Bros. Discovery Inc. Series A | WBD | 65% | 32% | 3% | $9.89 | $15.82 | 60% |
| Electronic Arts Inc. | EA | 63% | 37% | 0% | $132.68 | $145.70 | 10% |
| News Corp Class A | NWSA | 63% | 37% | 0% | $20.45 | $27.08 | 32% |
| Netflix Inc. | NFLX | 60% | 36% | 4% | $444.62 | $460.22 | 4% |
| Comcast Corp. Class A | CMCSA | 59% | 41% | 0% | $41.49 | $49.29 | 19% |
| Interpublic Group of Cos. Inc. | IPG | 47% | 53% | 0% | $28.73 | $34.00 | 18% |
| Charter Communications Inc. Class A | CHTR | 41% | 52% | 7% | $406.41 | $461.05 | 13% |
| AT&T Inc. | T | 41% | 52% | 7% | $15.58 | $17.86 | 15% |
| Verizon Communications Inc. | VZ | 38% | 54% | 8% | $35.82 | $39.42 | 10% |
| Fox Corp. Class A | FOXA | 25% | 61% | 14% | $29.59 | $34.58 | 17% |
| Omnicom Group Inc | OMC | 25% | 67% | 8% | $75.71 | $90.40 | 19% |
| Paramount Global Class B | PARA | 24% | 38% | 38% | $12.00 | $13.84 | 15% |
| Source: FactSet | |||||||
Among the companies with majority buy or equivalent ratings, Warner Bros. Discovery has the highest upside potential over the next 12 months, based on the consensus price target.
Among the believers in WBD is TD Cowen analyst Dough Creutz, who gave the stock an outperform rating with a $15 price target. He lowered that target from $19 on Nov. 10, while also cutting his estimates for the company’s revenue and earnings. That new price target is 52% higher than WBD’s closing price of $9.89 on Monday.
In a note to clients on Nov. 10, Cruetz called WBD’s turnaround opportunity “a more compelling investment case than any considerations with OTT.” The analyst went on to call WBD’s OTT strategy — which stands for over-the-top streaming of content to users — “more prudent and sustainable” than those of its competitors, and added that the shares “should trade at parity or even a premium relative to peers rather than the current discount.”
Wells Fargo analyst Steven Cahall also said he liked WBD, giving it an overweight rating and a $16 price target. That was lowered from $20 on Nov. 9. In a note to clients that day, Cahall called the stock “too cheap for the content quality.” He also wrote: “We don’t think WBD will stay idle. We expect licensing to increasingly factor into the mix. WBD has shown a willingness to transact, and facing potential challenges we think there are no sacred cows — a key reason we like this [management] team.”
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