2023-06-02 16:00:00 ET
Summary
- The dividend cut and headcount reduction were more than necessary to preserve PARA's liquidity and balance sheet, in my view.
- The intense streaming competition and uncertain macroeconomic outlook have more than impacted its profitability in the streaming and legacy segments, triggering further stock headwinds.
- As a result, we are uncertain if the March 2020 bottom may hold, since those levels may also be breached in the near term.
PARA's Dividend Cut Likely Can't Save Its Investment Thesis
PARA 5Y Stock Price
For now, Paramount Global ( PARA ) has plunged by -33.5%, after the drastic -79.2% dividend cut from the prior $0.24 to $0.05. While there are many ways of looking at this current situation, we applaud the management's difficult-yet-highly-commendable choice. This is why.
Based on the new payout per share, we are looking at approximately an annualized common dividend cash flow of $138.3M. This is naturally a stark difference from the previous FQ1'23 cadence of $664M annually ($166M multiplied by four).
This is on top of PARA's choice to cut headcounts as well, a move that may further moderate its operating expenses from the $1.89B reported in FQ1'23 (-11.6% QoQ/+9.2% YoY).
With the media company likely to save approximately $525.7M from the dividend cut and ~$700M in operating expenses annually (based on the -25% cut in headcount from the 24.5K employees declared in December 2022 and a median salary of $114.8K ), we may see its balance sheet gradually improve, especially given its underwhelming OIBDA and Cash Flow generation thus far.
PARA reported an annualized OIBDA of $2.19B ( -10.7% QoQ /-39.9% YoY) and net cash flow of -$1.51B (-272.6% QoQ/-195.2% YoY) in the latest quarter. This is a worrying performance, due to its annualized interest expenses of $904M (-1.7% QoQ/-5.8% YoY) and previous dividend payouts of $664M (+3.7% QoQ/+5% YoY).
This is on top of the media company's deteriorating balance sheet at cash/short-term investments of $2.1B (-27% QoQ/-60.3% YoY) and stagnant long-term debts of $15.61B (inline QoQ/-7% YoY) by the latest quarter, with an expanding weighted average interest rate of 5.13% (+0.2 points YoY) by FY2022.
In addition, PARA investors must also note that the interest rates for $643M and $989M of its debts will reset by 2027 to the equivalent of a 5Y Treasure rate +3.99% spread and floating rate, respectively.
While the sum may be minimal compared to its total long-term debts, with only $555M due by 2025, we concur with the media management's strategic choice to restructure the business at a time of uncertain macroeconomic outlook.
While we have been previously optimistic about the recovery of the economy by 2024, it appears that market analysts are now projecting a hard landing instead , with more expecting another Fed raise in the June meeting.
As a result of a leaner and more focused media company, PARA may then better survive the economic downturn, in our view, potentially conserving more liquidity in its balance sheet, with deleveraging taking second priority.
However, with a cut dividend, PARA is, unfortunately, neither an income stock nor a high-growth stock, placing it speculatively within an IP playbook, a similar conclusion to the one that we have made for Walt Disney Company ( DIS ).
In addition, thanks to PARA's sustained cash burn in the D2C segment at adj. OIBDA of -$511M (-12% YoY) in the latest quarter, due to the "higher costs to support the growth of Paramount+," market analysts expect the media company to generate an underwhelming FY2023 EBITDA of $2.35B (+7.7% YoY), EBITDA margins of 7.7% (-3.2 points YoY), and FCF of -$876M (-530% YoY).
This is on top of its deteriorating performance in the TV Media segment at adj OIBDA of $1.3B (-15.5% YoY) and Film Entertainment at adj OIBDA of -$99M (-168% YoY) by the latest quarter. As a result of the impacted profitability, it is unsurprising that the management has had to resort to drastic measures to preserve cash, similarly triggering Mr. Market's bearish sentiments.
PARA 5Y EV/Revenue and P/E Valuations
And it is for these reasons that we believe PARA is trading over-optimistically, at an NTM EV/EBITDA of 10.21x, higher than its 1Y mean of 9.74x and 5Y mean of 8.59x. Coincidentally, the stock is also trading near DIS at an NTM EV/EBITDA of 12.37x, despite the latter being expected to generate an adj EBITDA of $15.3B (-5.1% YoY) and EBITDA margins of 17.1% (-2.4 points YoY) in FY2023.
With a profitability reversal only likely in FY2024, it remains to be seen if the PARA stock may climb out of this rut, or further retrace to its previous March 2020 bottom of $12.63. We suppose the latter is quite likely, potentially allowing bullish investors to dollar cost average.
However, while past performance may not be indicative of forward results, with an underwhelming 10Y stock return of -51.74%, 5Y at -55%, and 1Y at -28% (prior to the plunge post-earnings call & dividend cut), we believe there may be many other streaming stocks for improved portfolio and/or income growth.
For one, our personal pick is Netflix ( NFLX ), which continues to generate annualized EBITDA of $7.2B (+180.5% QoQ/-11.7% YoY) and EBITDA margins of 22.1% in the latest quarter (+13.9 points QoQ/-3.9 YoY). It has also achieved higher Average Revenue per Membership ((ARM)) for its ad-supported tier in the US, exceeding the standard plan. This is on top of the much improved 1Y stock return of +101%, compared to PARA at -55.69%.
While PARA may have a robust IP, we remain uncertain about its prospects in the long term, since the intense streaming competition may be drawn out, with more price wars and consolidation likely occurring during the economic downturn, a sentiment similarly observed by Warren Buffett.
Therefore, we prefer to rate PARA as a Hold (Neutral) here, since the stock has yet to find a sustainable bottom, with more volatility almost certain due to its elevated short interest of 17.99% at the time of writing. This dip may continue ahead, beware.
For further details see:
Paramount: Dividend Cut Drastically Changes The Investment Thesis