Warner Music - Music To Our Ears

Warner Music - Focus Fund Portfolio Manager, Brian Macauley shares why Warner Music was added to the portfolio.

April 2023
  • Brian Macauley
    Brian Macauley, CFA
    Co-Portfolio Manager
  • David Rainey
    David Rainey, CFA
    Co-Portfolio Manager
  • Ira Rothberg
    Ira Rothberg, CFA
    Co-Portfolio Manager

Beau Barnett:
Hi everyone. My name is Beau Barnett, and I am the Sales Director for Hennessy Funds.

In this video, Portfolio Manager Brian Macauley of the Hennessy Focus Fund is going to highlight Warner Music and why he is excited about the prospects for the company in the ever-evolving music marketplace. 

We appreciate your time and look forward to speaking with you about how the Hennessy Focus Fund can complement your portfolio. 

Brian Macauley:
Thank you, Beau. At the Hennessy Focus Fund, we look to hold a concentrated portfolio of high-quality, well-run, growing businesses at reasonable valuations. Today, I want to talk to you about one of our new positions, Warner Music Group, a business that we think fits well with these criteria. Warner Music is a record label. In fact, it's one of the top three record labels in the world.

Warner, along with Universal Music and Sony Records, compose an oligopoly, controlling about 70% of all recorded music. A record label’s core function is to identify, develop, and distribute music for singers and songwriters. In exchange, the record label gets a percentage of revenue every time a record is sold or a song is played on TV, in a movie, or elsewhere. Warner represents a wide range of artists across many different styles and eras, including Ed Sheeran, Red Hot Chili Peppers, Lizzo, Prince, AC/DC, and thousands of others.

Historically, record labels were excellent businesses with strong competitive advantages and high returns on capital. But in the 2000s with the digitization of music, piracy became a really big problem. The emergence of Napster and BitTorrent undermined the economics of recorded music, leading to a lost decade, so to speak, for the industry. Beginning in the early 2010s and really gaining momentum over the last several years, streaming music services have changed the equation.

Spotify, Apple Music, YouTube Music, and others have revitalized the recorded music industry, returning record labels to once again being high-quality growth businesses. Today, there are about 500 million global subscribers to streaming music. We think that number is likely to grow to more than 1.5 billion subscribers over the next 10 or 15 years, leading to a new golden era for recorded music. 

Warner gets paid a fraction of a penny every time one of their songs is played on a streaming service.
While a fraction of a penny may not seem like much, across hundreds of billions of plays, it contributes to annual revenue of more than $6 billion at Warner Music. We think of Warner as a tollbooth on the growth of streaming music. We expect this growth to drive revenue growth at Warner of about 10% per year for much of the next decade.

Streaming is lower cost and more profitable to Warner than traditional forms of recorded music so we expect operating profit to grow faster than revenue in the low double digits, with acquisitions and share repurchases driving total EPS growth in the mid to high teens. We paid a low 20s multiple of earnings for Warner, a very good value, we believe, for a business that is positioned for such significant wealth creation over the next decade.

Thank you for listening and thank you for your interest in the Hennessy Focus Fund.