One of the challenges for every investor is the task of assimilating different storylines to put the market in practical context.
Beginning In 2022, the focus began to shift away from pandemic-driven questions to concerns about the pace of inflation and the rise in interest rates that some fear could push a growing economy into a full-fledged recession – concerns that continue to persist today. Those pressures have added uncertainty to just about every sector of the market, including the ones that became star performers in 2020 and 2021.
Through 2020 and 2021, one of the most bullish storylines focused on streaming services provided by companies like Netflix (NFLX), Disney (DIS), Amazon (AMZN), to name a few, who all saw big increases in their stock prices as subscriber growth rates surged. Over the last year or so, some of the luster has come off of these services; NFLX, for example reported two consecutive quarters of negative subscriber growth year, leaving analysts asking questions about the sustainability of the massive borrow and spending habits these companies employed to populate their services with content to keep consumers engaged. DIS has a similar story about its Disney+ service – especially given that reported miscalculations were a primary factor in the removal of Bob Iger’s replacement, and his reappointment as CEO late last year.
One of the companies that I’ve followed for quite a while, and been using in my value-focused system is Paramount Global (PARA). 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, the industry disruptors that fueled the consumer switch to streaming media. While Paramount has name-brand recognition, and carries weight in the TV and film industry, the name change was intended to reflect the company’s focus on shifting its business model to leverage its massive library of movies and shows, as well as its production capabilities and strengths in those legacy businesses in improving its own stake in the streaming media space.
One of the big numbers analysts in this space pay a lot of attention to is new subscriber rates. PARA owns Paramount+, its paid streaming service with access to movies, new and legacy TV titles, and live news and sports content, as well as Pluto TV, one of the world’s biggest free, ad-supported streaming platforms. Combined, these services give PARA an interesting foothold in the streaming media segment, with more than 140 million subscribers as of the latest earnings report. The company is investing heavily to expand their availability into the UK and much of Western Europe through the rest of 2023, in part by forging agreements for live sports broadcasts of European sporting events such as Euroleague soccer (nee´ football). In the area of traditional media, the company benefitted in 2022 from early success as manifested by the massive success of Top Gun: Maverick encouraging viewers to return to theaters for a traditional cinematic experience. With the latest installment of the Mission Impossible: franchise, along with a new Indiana Jones movie on deck this summer, the film studio could be in a good position to dominate the theater-driven movie experience, possibly through the rest of the year. Where its competitors rely on studio licensing agreements for legacy content, or to spend massive amounts of borrowed money to fund new projects, PARA’s massive, existing libraries, along with those tentpole franchise properties, give it a unique ability – shared, perhaps, only with Disney – to generate low-cost, incremental consumption that makes its multiplatform offerings even more interesting.
The real question, of course is what all of that means for the stock. The stock diverged from most of its brethren in early 2021, plunging from a peak at around $100 to about $40 in a matter of just a few Reddit-fueled trading days. In late 2021, the stock dropped down to new lows at around $29 but appeared to be establishing a new consolidation base until late April of this year. Bearish momentum in the market, along with broad momentum against companies in the streaming media space pushed the stock to a new, multi-year low at around $15 in November of last year. That provided a springboard for the stock to rally to a February peak at around $24, and consolidated in the low-$20 range until the start of May, when the market pushed the stock more than $5 lower overnight following the latest earnings report. Is the fundamental story for PARA really so bad that that stock should be cheaper, or is this just broader, industry-specific momentum having its way with a stock that is offering an incredible value? Let’s try to find out.
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 $10 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -85%, while revenue growth was flat, but negative, at -0.86%. In the last quarter, earnings increased by 12.5%, while revenues declined by -10.65%. The company is spending more than they are bringing in, manifested by the fact that over the last twelve months, Net Income was -1.49% of Revenues, and dropped sharply to -15.39% in the last quarter. That pattern confirms a longer pattern of quarterly decline over the last year that is attributable, at least in part, to the company’s aggressive investments in expanding its digital footprint; it entered the streaming media space well behind its competitors and is still playing catch-up.
Free Cash Flow: PARA’s free cash flow has been declining for more than a year as the company invests heavily in expanding its streaming presence. In the last quarter, Free Cash Flow was -$933 million, versus -$614 million a year ago and -$139 million in the quarter prior. It is worth noting that management is forecasting those efforts to pay off this year, while skeptical analysts are pointing to 2024. I’ll split the difference and say that if you like this company, you may need to think about the possibility of playing a long-term waiting game until later this year to see these numbers turn positive.
Dividend: PARA’s management slashed their annual divided payout after the last earnings announcement, from $.96 to $.20 per share, which translates to a yield of 1.34% at the stock’s current price. The dividend cut is a clear sign the company is looking for ways to cut costs and manage expenses.
Debt/Equity: PARA carries a Debt/Equity ratio of .70, which is a significant drop from 1.23 at the beginning of 2021 and .84 about a year ago. Their balance sheet shows about $2.1 billion in cash and liquid assets versus about $15.6 billion in long-term debt. Their operating profile is dragging on the company’s financial flexibility, and could become a larger problem the longer it continues. That means the quarters ahead certainly bear watching.
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. For additional context, I’ve also incorporated estimated growth rates into my analysis. All together, these measurements provide a long-term, fair value target at around $30 per share. That suggests that the stock is undervalued, with about almost 100% upside from its current price. It is worth noting that at the end of 2022, this same analysis yielded a fair value target price at around $64.50 per share.
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 PARA. The red diagonal line measures the length of the stock’s downward trend from its high a year ago at around $34.50 to its yearly low, reached just this week a little below $15. It also informs the Fibonacci trend retracement lines shown on the chart. After rallying to a little above the 50% retracement line at around $24 in February, the stock consolidated for the next couple of months. That changed at the start of May, after the market pushed the stock more than $5 lower overnight on the heels of the latest earnings report and dividend cut. The stock’s bearish momentum has pushed it below expected support around $15, marking immediate resistance there, with new, expected support possibly as low as $12, using the distance from immediate resistance to next expected resistance as a benchmark. That means that if buying activity increases, a push above $15 should find next resistance at around $15.
Near-term Keys: The deterioration of PARA’s core fundamental metrics – especially Free Cash Flow and Net Income – are a big concern, but as always, context is everything when you are working with a long-term investing strategy. I do think that the stock’s current, increasing bearish momentum, along with the weakening fundamental profile mean that thinking about a new, value-oriented investment is risky; I would wait to see if Net Income and Free Cash Flow can both reverse in sustained fashion before taking a new opportunity seriously. If you prefer to work with short-term trading strategies, you can also take a break above $15 as a signal to think about buying the stock or working with all options, with $18 offering a useful bullish profit target. The latest drop below $15 could be an interesting signal to consider shorting the stock or buying put options – but be quick to take profits at around $12 on a bearish trade.