Barron’s Weekend Summary: Warner Bros. Discovery David Zaslav CEO has a big salary and a big task at the parent company for CNN and Max
Cover Story:
Warner Bros. Discovery David Zaslav CEO has a big salary and a big task at the parent company for CNN and Max: turning around a media giant saddled with high debt and multiple challenges. Zaslav, or Zas, as he is known in the industry, has also become a bit of a lightning rod. Discovery was founded 38 years ago, shortly after which Tele-Communications, a company controlled by billionaire John Malone, who would become a mentor to Zaslav, bought a big stake. Zaslav, who previously worked at NBC, was named CEO of Discovery in 2006 and took the company public two years later. Zas—who “always plays offense,” according to company veteran J.B. Perrette, now WBD’s top streaming executive—deserves credit for growing Discovery revenue nearly 10 times from its initial public offering in 2008, to $33.8 billion in 2022. Zaslav achieved this early on, in part by replacing Discovery’s sleepy nature documentaries with unscripted, low-budget, lowbrow content like Shark Week, Naked and Afraid, and Dirty Jobs.
Interview:
- China debt watcher Charlene Chu, senior analyst at Autonomous Research talks to Barron’s about China’s real estate crisis. China’s property developers are under duress again, re-igniting concerns about a debt crisis. But with a faltering economy and diminished confidence among households and companies, Chu worries the ingredients are there for a broader financial crisis for the first time. The property sector, which holds 70% of Chinese households’ wealth, is ailing. Existing home prices slid 9% month over month in big cities in July, the steepest decline in a decade.
Tech Trader:
No update this week
The Trader:
-US government data on Friday showed a larger-than-expected gain of 187,000 nonfarm payrolls in August, but significant downward revisions for the previous two months totaling 110,000 fewer jobs than initially reported, putting the three-month average job growth near 150,000—below February 2020. The unemployment rate jumped to 3.8% from 3.5%, while the labor-force participation rate rose 0.2%, for its first increase since March. Even the monthly gain in average hourly earnings slowed, while average hours worked rose.
- Health-care stocks have been deeply out of favor this year. While the S&P 500 has gained 18% year to date, the 65 health-care companies in the index have lost an average of 1%. Pharmaceutical and biotech stocks, in particular, have been hit or miss. For every Eli Lilly, which has soared 50%, Zoetis, which has gained 32%, and Vertex Pharmaceuticals, which has jumped 21%, there’s a Moderna, Pfizer, or Organon, which have fallen 35%, 30%, and 20%, respectively. The divergent performances exemplify the risk that investors take by betting on drug developers. There are some with recent scientific and commercial wins—like Lily’s upcoming Alzheimer’s treatment Donanemab and its diabetes drug Mounjaro, which may soon be approved in the US as a weight-loss treatment. On the other hand, Pfizer and Moderna have yet to follow their Covid-19 vaccine successes with new blockbusters.
Features:
-Trouble spots at the IRS agency remain, and continued improvements in service hang in question now that the agency’s 2024 base funding—along with extra funding promised under the 2022 Inflation Reduction Act (IRA) for upgrades—is on lawmakers’ chopping block. Of the $80B allocated to the IRS under the IRA in August last year for improvements over 10 years, $20B was already rescinded under the Fiscal Responsibility Act in June this year. President Biden is calling for an increase in IRS appropriations for the 2024 fiscal year to $14.1B from $12.3B to account for inflation and a 2% cut made in 2022; House Republicans are aiming to cancel unspent IRA funds and slash $1.1B out of the annual budget, reducing it to $11.2B.
Europe:
Chinese manufacturers are raising the intensity of the race to dominate the electric-vehicle market. China’s BYD and Tesla are likely to come out as the winners, while European manufacturers like Volkswagen and Renault are set to lose out, according to analysts at UBS. BYD is the key company driving competition in the EV space now, with a sustainable cost advantage of around 25% over the legacy car companies, according to UBS analysts led by Patrick Hummel.
BYD’s Seal battery-electric vehicle exemplifies the threat to the rest of the industry. It recently cut the price on the model to less than $30,000. UBS estimates BYD is achieving a 16% gross margin and 5% earnings before interest and tax margin on the Seal, similar to profits made on mass-market internal combustion engine cars globally.
Emerging Markets:
-The wobbly Chinese property market is only making people more nervous and government efforts to boost consumption have been mis-targeted and insufficient, when they aren’t simply absent. “Boosting consumption may be the best solution, but the government’s plans to do so don’t seem credible,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research.Chinese have reasons to save beyond the falling value of their homes, which are their core nest eggs. China’s once revered pension system’s future is becoming muddier each year. The country’s rapidly aging population soon will not be able to be supported by a dwindling number of working-age contributors to the social security system, and the pension system is already feeling the effects.
Commodities:
-Could Hurricane Idalia push gasoline prices down? Hurricanes often damage oil refineries, causing prices of fuels like gasoline to soar. Hurricane Idalia, which made landfall in Florida on Wednesday, looks like it will be an exception. In fact, there’s a chance that the net effect of the hurricane actually will be to drag fuel prices lower. Previous hurricanes—such as Hurricane Harvey in 2017 and Hurricane Ida in 2021—had major impacts on refineries, inflicting damage and causing several facilities to shut down. Harvey damaged refineries owned by Exxon Mobil, among others, causing more than 4 million barrels of refining capacity per day to go offline temporarily. Total U.S. refining capacity is about 18 million barrels. Gasoline prices rose about 20 cents per gallon in the days afterward.
Streetwise:
No update from Jack Hough this week.