PARAP - Overcoming The Difficulties: Paramount's Staying Power In The Industry

2023-08-05 08:19:53 ET

Summary

• On August 7, 2023, Paramount Global, a leading multinational media and entertainment company, will publish its financial report for the second quarter of 2023.
• The number of Paramount+ subscribers was 60 million at the end of March 2023, up 38.6% year-on-year and 7.3% quarter-on-quarter.
• The company is raising prices on the Paramount Plus Essential plan effective July 27, 2023, which will benefit its margin recovery as early as the third quarter.
• In early August 2023, news broke that KKR was in advanced talks to acquire book publisher Simon & Schuster from Paramount for approximately $1.65 billion.
• We initiate our coverage of Paramount Global with an "outperform" rating for the next 12 months.

On August 7, 2023 , Paramount Global (PARA), a leading multinational media and entertainment company operating in various sectors, including television, film, and streaming, will publish its financial report for the second quarter of 2023.

The company's portfolio includes world-famous brands like Nickelodeon, CBS, Showtime Networks, MTV, Pluto TV, and more. At the same time, Paramount Pictures continues to actively release both television programs and films, the most successful of which are Titanic, Transformers, and Mission: Impossible.

On July 12, 2023, the first screening of the film Mission: Impossible - Dead Reckoning Part One took place on American movie theater screens. According to Box Office Mojo , Tom Cruise's blockbuster took first place at the box office on its opening weekend, bringing in $54.2 million in sales. To date, its worldwide sales continue growing and amounting to just over $452 million.

At the same time, the fast-growing subscription streaming service Paramount+ delights viewers with original series like Tulsa King, 1883, Halo, 1923, Rabbit Hole, and SEAL Team, which ultimately leads to a rapid increase in subscribers.

Despite the rapid expansion of TV series, films, and news that Netflix was exploring the acquisition of Paramount to expand its film studio, the company's share price has decreased by more than 7% since the beginning of 2023.

We initiate our coverage of Paramount Global with an "outperform" rating for the next 12 months.

The financial position of Paramount Global and its prospects

Paramount Global's revenue for the first three months of 2023 was $7.27 billion, down 10.6% from the previous quarter and down 0.82% from the first quarter of 2022. Moreover, its actual revenues have beaten analyst consensus estimates in five of the past nine quarters, suggesting Wall Street's objective assessment of Paramount's business prospects during the current recovery in US consumer spending.

According to Seeking Alpha , Paramount's revenue for Q2 2023 is expected to be $7.22-$7.93 billion, up 0.4% from analysts' expectations for the first three months of 2023. Moreover, under our model, the total revenue of Paramount will be within this range and amount to $7.5 billion.

By the end of March 2023, the total number of subscribers of the service was 60 million, marking a remarkable 38.6% growth compared to 2022 and a 7.3% increase compared to the previous quarter. This significant growth can be partly attributed to the company's proactive strategy to expand its presence in the fast-growing video streaming market. In addition, the launch of new shows such as 1923, Baby Shark's Big Show, Tulsa King, Rabbit Hole, and The Family Stallone is attracting more and more people to subscribe to Paramount+.

At the same time, on a global scale, the growth of the service's subscribers was not significantly affected by the military conflict in Eastern Europe, when the company had to remove about 1.2 million Paramount+ subscribers in Russia.

In the second quarter of 2023, we expect total subscribers to reach 64.8 million, up 4.8 million from the previous quarter. Our guess is based on several factors. The first is that since Q1 2021, Paramount+'s average quarterly subscriber growth has been 5.44 million. At the same time, in recent months, the company has launched several shows that have caused a lot of positive emotions among its viewers. Moreover, rising consumer spending in the US positively affects the industry. Thus, the number of Netflix subscribers amounted to 238.4 million in the 2nd quarter of 2023, an increase of 5.89 million compared to the previous quarter.

At the same time, when building our model, we considered the likelihood of another increase in the interest rate by the Fed and the ECB and the deterioration of the geopolitical situation in Eastern Europe, which could negatively affect the Baltic countries.

However, starting in the third quarter, we also expect Paramount's revenue to rise due to price increases for the Paramount+ Essential plan from $4.99/month to $5.99/month.

From the first quarter of 2024, we expect the number of subscribers to the company's subscription streaming service to accelerate, driven by an expected Fed rate cut in early 2024. This event will provoke the population to move from the savings behavior and more actively spend savings on improving their quality of life.

Paramount Global's Q1 2023 operating income margin was 5.56%, continuing the decline that began in Q1 2022 while deviating significantly from its median of 11.17% between January 1, 2021, and the end of March 2023. The decrease in the company's margins is mainly due to the increased cost of content produced for multiple streaming services, expenses for third-party distribution, and support for new movie releases.

The company's EPS for the first three months of 2023 was $0.09, up 12.5% quarter-on-quarter, but it beat analyst consensus estimates in only four of the last nine quarters. According to Seeking Alpha , Paramount's Q2 EPS is expected to be between -$0.4 and $0.12, significantly lower than the consensus estimate for Q1 2023. While we view these expectations as conservative, our model puts Paramount's EPS at $0.02.

At the same time, Paramount Global's Non-GAAP P/E [TTM] is 12.58x, which is 9.72% less than the average for the sector and 33.94% higher than the average over the past five years. On the other hand, P/E Non-GAAP [FWD] is 24.53x, which is one of the factors indicating that the company is significantly overvalued in the current period of consumer spending growth in the US and Europe.

At the end of March 2023, the company held senior notes and debentures that were below its EBIT. In our opinion, this allows Robert Bakish to continue focusing on the active development of streaming platforms in the future, not on issues related to Paramount Global's debt.

Moreover, Paramount's total debt was about $17.25 billion at the end of the first quarter of 2023, down $2.38 billion from 2021. On the other hand, due to a significant drop in EBITDA in recent years, the total debt/EBITDA ratio has increased from 4.47x to a record of 6.1x for the company.

Given the company's cut dividend payouts , senior note maturity dates, and rising revenue from its streaming services, we don't expect Paramount to have trouble redeeming them.

Risks

In our assessment, there are two main risks to consider that could affect both Paramount Global's financial position and its share price.

Deterioration of macroeconomic and geopolitical conditions due to the war between Russia and Ukraine

Recently, there has been a tightening of the confrontation between Russia and Ukraine, which, among other things, led to the suspension of the Black Sea grain deal. This event may eventually lead to accelerated inflation in both the European Union and Turkey, negatively affecting consumer demand. In addition, a new round of tension between Belarus and Poland begins due to the presence of the Wagner group on the border. This may lead to growing fears among the population of the Nordic countries regarding economic and geopolitical stability in the region. As a result, some of Paramount+'s subscribers may stop using this service and decide to start saving money.

Lack of financial ability to buy back shares of Paramount Global.

The decline in net income in recent quarters and the need to invest in numerous projects have meant that Paramount's management cannot resort to using the share buyback program. As a result, the number of outstanding shares continues to grow, which, among other things, harms the company's EPS.

Conclusion

Before the market opens on August 7, 2023, Paramount Global, a leading multinational media and entertainment company operating in various sectors, including television, film, and streaming, will publish its financial report for the second quarter of 2023.

The company continues to transform to overcome the decline in profitability caused by increased investment in Paramount+ and other projects. To this end, Paramount's management has substantially cut its dividend payout to stabilize its financial position. On the other hand, this decision had a negative effect on the price of its shares due to the disappointment of long-term investors.

At the same time, Robert Bakish's aggressive policy to increase Paramount+'s share in the fast-growing video streaming market is beginning to bear fruit. Thus, the number of Paramount+ subscribers grew to 60 million at the end of March 2023, an increase of 38.6% compared to the previous year. At the same time, according to our estimates, the price increase for the Paramount Plus Essential plan from July 27, 2023, will favorably affect the recovery of the company's margins already in the third quarter.

In addition, the news that KKR (KKR) is in advanced talks to acquire book publisher Simon & Schuster from Paramount for approximately $1.65 billion, helping to reduce the influence of short sellers on the company's share price.

We initiate our coverage of Paramount Global with an "outperform" rating for the next 12 months.

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