With tens of thousands of stocks in the market to choose from, it’s easy to get lost in the mountains of information and data that we have access to about every single one of them. That’s one of the big reasons that over time, I’ve learned to rely on a watchlist of stocks that I’ve followed, in some cases for decades and in most for at least a few years. This is a list that I’ve been curating for as long as I’ve been investing, which also means that I’ve been pruning it and refining it throughout that time. It’s a list that clearly reflects my preference for fundamentally solid, dividend-paying stocks, and that I continue to be able to use, and occasionally update to find productive, value-oriented investments.
The thing about keeping track of a company for a long period of time is that you become very familiar with the characteristics and trends that typically define it. One of the things that kind of familiarity requires in order to maintain investing discipline is the willingness to apply the same kind of focused, objective analysis methods that you would apply to a company you’ve just discovered – to avoid giving a company a pass just because you’re familiar with it. Even then, even the most carefully considered and executed discipline can be caught by surprise.
One of the companies that I’ve been following for a while, and been using in my value-focused system is ViacomCBS. This is a company formed from a merger between Viacom and CBS Corporation, creating a combined television and film studio designed to stand on its own in the Media industry of the Communication Services sector. This is an industry that has become dominated by streaming services, with major TV and film studios like Disney, Warner Bros., and ViacomCBS all looking for a foothold to compete with Netflix and Amazon, to name just a couple of industry disruptors.
While I consider myself to be pretty familiar with this company, and confident in previous opinions I’ve written about its fundamental strength and what I think are favorable moves it has made to not merely survive, but compete effectively against its rivals, the company took me completely by surprise with its latest earnings announcement, which was headlined by renaming the company to Paramount Global and adopting a new stock symbol, PARA. Fortunately, I wasn’t the only one; a number of data services still haven’t caught up to the change and successfully migrated VIAC’s market data to its new symbol, almost a week after the fact.
The interesting thing about the stock is the way it plunged after the earnings report. From about $36, which also marked the top end of a consolidation range that had been holding for most of the last two months, the stock immediately dropped by $6 overnight, and is now a little below $29 to start this week. Whether the drop is all about the name change is probably doubtful, but it does beg the additional question of whether the stock’s fundamentals, which came through the worst of 2020 in surprisingly good shape are still holding up, and what that means for the stock’s practical value proposition. Let’s dive in.
Fundamental and Value Profile
Paramount Global, formerly ViacomCBS Inc., is a global media and entertainment company that creates content for audiences worldwide. The Company’s business segments include TV Entertainment, Cable Networks, and Filmed Entertainment. The TV Entertainment segment operates the CBS Television Network, its domestic broadcast network; CBS Studios and CBS Media Ventures, its television production and syndication operations; CBS branded streaming services, including CBS All Access/Paramount+; CBS Sports Network, and its cable network focused on college athletics and other sports. The Cable Networks segment operates a portfolio of streaming services, including Pluto TV, a free advertising-supported streaming television (FAST) service and Showtime Networks’ subscription streaming service (SHOWTIME OTT). The Filmed Entertainment segment operates Paramount Pictures, Paramount Players, Paramount Animation and Paramount Television Studios, and also includes Miramax, a consolidated joint venture. PARA has a current market cap of about $18.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -75%, while revenue increased by 16.38%. In the last quarter, earnings were almost -66% lower, while revenues were increased by 21%. Declining earnings, with increasing revenues suggests that the company is spending more than it earns, but their operating profile, which I often take as a leading indicator of earnings and cash flow growth, suggests just the opposite. Over the last twelve months, Net Income was 15.89% of Revenues, and increased impressively to almost 26% in the last quarter..
Free Cash Flow: PARA’s free cash flow is modest, at $599 million. This number declined from about $1 billion in the last quarter, and $3.3 billion a year ago. The current number translates to a marginal Free Cash Flow Yield of 3.26%. Contrasted against the Net Income picture I just described along with the negative earnings pattern, I think it suggests better times are ahead, but free cash flow and earnings are both metrics that bear watching in the quarters ahead.
Dividend: VIAC’s annual divided is $.96 per share, which translates to a yield of 3.38% at the stock’s current price.
Debt/Equity: PARA carries a Debt/Equity ratio of .77, which is a significant drop from 1.23 at the beginning of 2021, and .84 in the previous quarter. Their balance sheet shows about $6.2 billion in cash and liquid assets versus about $17.7 billion in long-term debt. Their operating profile suggest that the company should have no problem servicing their debt, with good flexibility and liquidity to go along with it. Management has also indicated their intention to use their cash position to further reduce debt and increase shareholder returns (presumably in the form of stock buybacks and/or dividend increases).
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little above $85 per share. That suggests that the stock remains massively undervalued, with about 200% upside (not a typo) from its current price. It should also be noted that just a few quarters ago, my analysis put the stock’s long-term target at around $102 per share, and a little below $85 in the last quarter.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart looks at the last year of price activity for VIAC. The red diagonal line measures the length of the stock’s downward trend from its March 2021 high at around $102 to its most recent low, seen at the end of last week at around $28. It also informs the Fibonacci trend retracement lines shown the chart. The stock held a strong consolidation between $42 and $38 until mid-October, before larger economic questions finally pushed the stock out of that range late that month. The stock stabilized beginning in December and began setting a new, broader consolidation range between $28 and $36 through the early part of February, when the downward trend picked up momentum again, pushing the stock to its current level. Immediate resistance appears to be around $30.50 based on the of the stock’s consolidation range from December to this month, where previous support sat, while current support is around $28. A drop below $28 should find next support around $26, while a push above $30.50 should have upside to about $36 at the top of the previous consolidation range.
Near-term Keys: Considering the fact that PARA’s fundamentals remain pretty solid, it looks like the stock’s drop is a reflection of the market’s reaction to the name change as well as the current, negative earnings pattern. Declining free cash flow is another, legitimate concern, but considering the increase in cash and liquid assets while debt has not increased, along with material gains in Net income offer what I take as a useful counter. A lot of other stocks in the streaming space have been beaten up a bit in the last couple of weeks, which means that PARA is also likely bearing the brunt of some of that sentiment as well. If you aren’t afraid of the potential that the stock could continue to follow its current, long-term downward trend, I do think the value proposition is beyond compelling – but it also isn’t unreasonable right now to put the stock aside and wait for stronger indications that sentiment is turning bullish before taking on a new position. If you prefer to work with short-term trading strategies, you can also take a break above $30.50 as a signal to think about buying the stock or working with all options, with $36 offering an interesting, bullish profit target. A drop below $28 could be an interesting signal to consider shorting the stock or buying put options – but be quick to take profits around $26 on a bearish trade.