Warner Music Group Corp. (WMG) stock intrinsic value fair value estimate & owner earnings analysis

Warner Music Group owns and licenses recorded music and song copyrights. It has two businesses: Recorded Music, which was 81% of fiscal 2025 revenue of $6,707 million, and Music Publishing (Warner Chappell), which was 19%. Streaming is the main source of income, bringing in $3,505 million in fiscal 2025. That makes the company dependent on a few digital partners: Spotify paid 20% of total revenue, YouTube 12% and Apple 11%. About 43% of sales were booked in the United States, 13% in the United Kingdom, 8% in Germany and the rest across other countries. Access Industries holds a controlling interest in the company. How we measured earnings. We start with cash from operations. We remove short-term swings in working capital, then subtract stock-based pay and the capital spending needed to keep the business running. On that basis the company earned $1.16, $1.29, $1.23, $1.43 and $1.37 per share in fiscal 2021 through 2025. We start from the middle of that range, $1.29. Fiscal 2024 was helped by about $148 million of one-off revenue: a catalog licensing extension, catch-up payments from a streaming service and an upfront license renewal. Years before 2021 describe a smaller business from before streaming grew to its current size. Fiscal 2020 was negative because of a one-time $608 million stock compensation charge at the June 2020 IPO. Accounting judgements. The company wrote off $258 million of acquired catalogs as amortization in fiscal 2025. We add that non-cash charge back. To account for older recordings earning less over time, we base our growth rates on the company's own record of streaming growth, which already includes that fading. Advances paid to artists sit in working capital. Over ten years, net advances (about $1.33 billion paid out) and money owed to artists (about $1.45 billion held) nearly cancelled out. Even so, working capital used $422 million over the decade and about $163 million a year in fiscal 2023 to 2025. So we charge an ongoing $0.08 per share a year in the base and bull cases and $0.15 in the bear case. The company is also acquiring catalogs through Beethoven, a joint venture with Bain Capital launched in July 2025 that can acquire up to $1.2 billion of catalogs. It spent $505 million on catalogs in the first nine months of fiscal 2026. We treat these purchases as investments outside ordinary earnings, and we give no credit for growth from future acquisitions. Debt. Long-term debt was $4.71 billion at June 30, 2026. About $2.78 billion of it is fixed-rate notes paying 2.25% to 3.875%, due between 2028 and 2031. Our earnings figures already include interest paid. The risk is that this debt is refinanced at higher rates, and we charge that in each case. Base case, $35.10 per share. A restructuring plan announced July 1, 2025 targets about $300 million of yearly pre-tax savings by the end of fiscal 2027. Management says most, but not all, of that will flow through to operating profit. Results for the nine months to June 30, 2026 suggest it is already working: operating cash flow was $708 million against $447 million a year earlier, revenue grew 12% and operating income was $857 million against $551 million. Fiscal 2025 owner earnings fell 4.6%. Even so, we assume fiscal 2027 earnings of $1.60 per share before the working-capital charge. That is $1.29 plus about $0.29 of after-tax savings and one year of growth. After that, growth is 6% a year for four years and 4% for five years. The 6% is below the company's 9% yearly streaming growth from fiscal 2020 to 2024 and its 8% underlying revenue growth in fiscal 2025. Refinancing adds about $0.08 per share of cost from 2030. After year ten we hold earnings flat. Copyrights last for decades, and the company's older recordings still earn money today, so earnings should not simply stop. We do not assume they keep growing either. Bear case, $16.98 per share. The savings are spent on artist signings or lost to competition, and earnings stay at $1.29. Renewals with Spotify, YouTube and Apple, which together pay 43% of revenue, come on weaker terms, holding growth to 2% a year. Artist advances keep using more cash, refinancing costs about $0.14 per share from year three, and after year ten earnings shrink 2% a year as the catalog ages. Bull case, $47.78 per share. Most of the fiscal 2026 improvement holds, giving fiscal 2027 earnings of $1.85. Paid subscriptions keep spreading: the company's filing says paid penetration is about 57% in the United States, 50% in the United Kingdom and 41% in Germany, well below the Nordic countries. Growth is 8% a year and then 6%, refinancing costs less, and earnings are held flat after year ten. Margin-of-safety price. The margin-of-safety price is $21.50. That is roughly 39% below the base case, a wide margin because of the debt, the reliance on three digital partners and a savings program that has only a few quarters of results behind it. It is about 27% above the bear case. What would make this wrong: worse terms with the major streaming services, the restructuring savings being spent instead of kept, or growth in the last few quarters turning out to come from acquisitions and currency rather than the existing business. Figures from the interim reports do not separate catalog purchases and currency effects from underlying growth. Share counts before the 2020 IPO are adjusted for the stock split.