PARAP - Paramount: It's Finally Time To Buy The Massive Drop (Rating Upgrade)

2023-07-16 08:30:00 ET

Summary

• Paramount Global's parent company, National Amusements, is negotiating with creditors over its loans due to lower cash flows and financial risks.
• Despite a dividend cut and a weak Q2 expected in August, Paramount is expected to improve its earnings and free cash flow by 2024.
• I assessed that significant pessimism seems to have been priced in, as dip buyers returned confidently in late May, defending against the free fall.
• While income investors could remain sidelined for now, value investors could see a fantastic opportunity to buy more, while the market remains in a panic over PARA in the near term.

I have been waiting for an opportunity to become more constructive with Paramount Global ( PARA ) stock, and I think the time has arrived. The Wall Street Journal, or WSJ, reported over the weekend that " Paramount's parent company is in talks with creditors after disclosing financial risks."

Accordingly, National Amusements was reported to be negotiating with creditors over the company's loans. Its lenders likely seized on the opportunity on its disclosure of its "ability to continue as a going concern" due to "lower cash flows" on its annual report. However, that caution has been present since the start of the COVID pandemic and, therefore, isn't a pivotal new development.

However, the timing of the negotiation likely stems from the lenders seeing an opportunity to renegotiate for better terms and charging higher interest rates to the company. Furthermore, National Amusements highlighted that it "has made all interest payments on the debt in question on time.: It also remains in talks and "is working to resolve the matter with its lenders expeditiously."

As the 80% holder of Paramount Global's voting stock, holders could feel discouraged to return to PARA in the near term. However, it's also crucial to note that the stock formed a timely bear trap or false downside breakdown in May.

That's right. I gleaned that dip buyers returned strongly in late May and helped defend PARA against a further selloff. In addition, PARA remains attractively valued (Seeking Alpha Quant rating of a "B+" valuation grade).

I previously urged investors to remain on the sidelines in early May after management slashed its dividend, likely leading to a mass exodus in Paramount income investors. However, I also highlighted that it seemed like a capitulation move. Still, I reminded holders to "remain patient until they observe constructive price action suggesting that investors are buying the current levels aggressively."

The good news is I think the opportunity is appropriate for investors to consider adding more exposure now. Let's assess a few crucial factors. Analysts' estimates on Paramount Global's forward dividend payouts have not worsened, expecting the company to report a downgraded quarterly dividend of $0.05 per share. In addition, the company is also likely to climb out of its free cash flow or FCF malaise in FY24, with its worst expected to bottom out in the first half of FY23.

Therefore, investors could expect Paramount to report another weak Q2 earnings release in August. However, I believe the market has already reflected it accordingly with the steep selloff in May, considering the analysts' estimates.

CFO Naveen Chopra remains confident in a recent June conference that the company expects its direct-to-consumer losses to peak this year, "leading to significant earnings and free cash flow improvement in 2024." Despite that, we must be circumspect about management's optimism, given the company's reliance on TV advertising in the near term, which is expected to remain tepid.

Paramount Global also faces near-term headwinds over the " double acting /writing strike, which is the first of its kind in 63 years." However, these challenges aren't expected to be " structural ," even though "fixes take time." As such, Paramount Global's challenges on the strike and TV advertising are likely transitory, and I assessed buyers who returned in May had expected significant challenges as priced in accordingly.

PARA formed an astute bear trap in late May as dip buyers returned in force to underpin those lows.

Also, since then, PARA dip buyers have refused to give up those levels, allowing the constructive consolidation I asked for before turning more optimistic over a mean-reversion opportunity.

However, holders who decide to add more shares must note that PARA remains in a downward bias. Therefore, I assessed that taking meaningful exposure off if PARA mean-revert to the low $20s zone seems appropriate.

For now, I see an attractive risk/reward profile for PARA investors who waited on the sidelines for buying support before considering returning. As such, I'm ready to upgrade my thesis on PARA.

Rating: Buy (Revised from Hold).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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