I’ve had a small position in this company for a while, and can’t wait to add more to my ISA portfolio.

What is the company?

Warner Bros Discovery (NASDAQ: WBD), also known as WBD, stands as a monumental player in the entertainment industry. It was formed in 2022 by the merger of Warner Media and Discovery Communications.

Its approach under CEO David Zaslav is notably different from rival Netflix‘s. Emphasising a traditional model with theatrical releases and weekly content drops, it’s moving away from the all-at-once release strategy that characterises Netflix. This shift is part of a broader strategy to streamline operations, marked by significant cost reductions and a focus on profitability over volume. However, this has led to concerns in the creative community, as Zaslav’s aggressive cost-cutting includes cancelling projects that were already shot and ready to air​.

For the third quarter, it reported robust financial results, with significant achievements in both the film industry and its direct-to-consumer segment. However, recent writer strikes, fears of higher interest rates, and a steep decline in consumer and advertiser spending prompted the company to cut its earnings guidance. This naturally led to a decline in the share price, but I think this might be the perfect opportunity to buy for my Stocks and Shares ISA.

How are the numbers?

Q3 saw earnings rising 22%, and over $2bn in free cash flow. However, the company reported a net loss of $417m due to acquisition-related intangibles and restructuring expenses. This financial situation reflects the challenges Warner Bros Discovery faces while trying to pivot and grow in the streaming sector​. But if this turnaround is a success, it could be a great investment for me.

A discounted cash flow calculation suggests that shares may be 53% below fair value. The price-to-sales (P/S) ratio of 0.6 times is well below the average of the sector at 3.2 times. I get really excited when I see a company so far below fair value, but there’s usually a reason for this.

Debt mountain

For the answer, I need to look no further than the company’s $44.8bn debt. In a period of high interest rates, this is about as red a flag as it gets for a company. But with a strong pipeline of content, such as the recent Barbie movie (which reportedly brought in $1.44bn) and with the debt situation likely to improve as interest rates cool, I see some serious long-term potential here.

Am I buying?

Good investing is all about buying shares in quality companies for less than they’re worth. In this one, I see a company putting all the right steps in place to turn around its fortunes. There may still be some difficulty ahead, but by taking a long-term approach for my ISA, I think this could be a winner. I’ll be buying more at the next opportunity.

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