Foolish Forecast: Sweet Sounds From Warner Music

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Friday morning, giant music label Warner Music Group (NYSE: WMG) releases results for Q4 and the full fiscal year of 2006. Let's see what tune the MC is humming.

What analysts say:

• Buy, sell, or waffle? Twelve analysts follow the company these days. One of them wants to sell, and three feel like buying the stock. The other eight are simply holding.
  
  
• Revenues. $894 million of sales would satisfy the analyst community, though it would represent a step back from the $905 million achieved last year. That's $3.56 billion of sales for the full year, up slightly from $3.50 billion in 2005.
  
  
• Earnings. The average forecast calls for a breakeven quarter, down from $0.08 per share a year ago. That would mean earnings of $0.34 per share for the year, up from $0.25 per share in 2005.

What management says:
In the latest earnings conference call, CEO Edgar Bronfman beamed over Warner being the only major label to increase album sales and total music sales in the past six months. He also noted that his company remains "the clear leader in digital." That attitude is supported by the presence of extra tracks on the digital versions of the Red Hot Chili Peppers' back catalog, which raised demand for those old albums.

But what he didn't say is almost as interesting. Bronfman didn't spend any time complaining about music piracy hurting his business, outside of the Russian and Chinese markets. That's a small but refreshing attitude shift, and it shows that Warner -- like Disney before it -- may have started to see piracy as a form of competition that should be fought with the tools of the free market, not with lawsuits and witch hunts.

What management does:
Gross margins here are very stable, and the ratios closer to the bottom line have been improving lately. Mind you, the net margin is razor-thin, but it's better than being negative.

Margins %	3/05	6/05	9/05	12/05	3/06	6/06
Gross	47.5	47.6	47.2	48.0	48.2	47.9
Op.	5.1	4.3	4.7	5.1	5.9	6.7
Net	30.3	27.3	(4.8)	(3.9)	(4.2)	0.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Warner has been trying to work up a merger with European music powerhouse EMI Group, but pressed pause on those plans after a similar deal between Sony (NYSE: SNE) and Bertelsmann AG was shot down by European regulatory powers. Recent rumors about private equity interest in EMI could drum up a new Warner bid, and damn the torpedoes.

The hookup would mean greater efficiencies, as redundant functions of the two organizations get removed, and would give the new beast more market pull by dint of its sheer size. It's also a quick path to growing sales at a time when most music labels are having trouble doing so.

We'll see in the morning whether Warner's digital strategy has translated into results for this quarter. Operational trends from the past few quarters point to "yes," with a tiny fanfare.

Competitors:

• Sony BMG Music Entertainment
• Vivendi Universal Music Group

Disney is a Stock Advisor recommendation. Try a 30-day free trial of any of our services.

Fool contributor Anders Bylund is a Disney shareholder, but holds no other position in any of the companies discussed here. You can check out Anders' holdingsif you like. Foolishdisclosurealways sounds good.