Interactive Investor

Can two lockdown success stocks keep winning?

17th August 2022 10:02

by Rodney Hobson from interactive investor

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Can these two companies thrive in the post-pandemic era, asks overseas investing expert Rodney Hobson.

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A constant theme for investors for this year at least is to consider which of the comforts that we found to be essential during lockdowns will endure in the post-pandemic era. One winner and one loser stand out.

Warner Music Group (NASDAQ:WMG) reported sales up 7% to $1.43 billion in the three month to 30 June, Warner’s third quarter, while net income for the quarter doubled from $61 million to $125 million.

The recorded music arm capitalised on the popularity of artists such as Ed Sheeran and the highly respected, long-standing status of labels such as Parlophone. The group also publishes music from more than 65,000 composers through Warner Chappell.

Growth did actually slow in the quarter, as revenue from streaming services through outlets such as YouTube and TikTok was up 2% rather than the 10% of recent quarters. That could be a short-term headwind but the strong dollar, which reduces the translation of overseas earnings, is continuing and will almost certainly hold back the current quarter’s figures.

However, a strong programme of releases before Warner’s financial year end on 30 September should reassure investors.

Warner Music Group chart August 2022

Past performance is not a guide to future performance.

interactive investor contributor Edmund Jackson alerted ii followers to what was one of the biggest floats of 2020 in June that year and his piece is still well worth reading.

One word of caution: WMG is controlled by Access Industries, which has 99% of the voting rights and is clearly not going to give up control in the foreseeable future. However, it has 84% of financial ownership and will be as keen to see dividends rising as any long-term investor is. Do bear in mind that means only 16% of the shares are traded, so the spread between the buying and selling prices could be unusually wide.

The shares started trading around $30 and are back around that level now but the potential looks to be on the upside. Most of the past two years has been spent above $30 and the shares have been as high as $49, while the lowest point was $25 last month.

The yield is quite low at around 2%, but Access has every interest in raising the payout.

Barry McCarthy, new chief executive of Peloton Interactive (NASDAQ:PTON), the maker of bicycles that go nowhere, is on a roll, which is more than can be said for the company or its shares.

Six months into the job, he has decided that only drastic action can save the loss-making company. He is cutting 800 jobs, closing retail showrooms, outsourcing production and sales and raising prices by about a quarter.

Peloton Interactive chart August 2022

Past performance is not a guide to future performance.

Clearly drastic action was needed as sales slumped and subscriber numbers started to slip. McCarthy acknowledges that Peloton cannot continue to haemorrhage cash but there is no guarantee that the cure will be any better. Higher prices will mean some sales will be lost and with stock piled up in warehouses it can be argued that a cut-price sale was what was needed.

The shares peaked at $180 in December 2020 but have slumped as low as $9 recently, thus losing 95% of their stock market value. They have now ticked up to $13.80 in what could well be a dead-cat bounce.

Hobson’s choice: I warned investors back in February to stay well clear of Peloton and repeated the advice in May, while there was still time to get out before the shares hit rock bottom. Peloton stock has perked up on the news that the many problems are being addressed. Those who ignored earlier warnings can now get out for a dollar or two more than they could last week. Sell.

Warner Music is a buy up to $31.50 with a short-term target of $35.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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