2023-12-27 11:30:00 ET
Summary
- PARA's profitability remains tied to the declining TV Media segment, with the unprofitable streaming yet to offset the sustained cord cutting post-pandemic.
- Recent news suggests a potential change in ownership for PARA, leading to immense market speculation and increased investor interest.
- This has triggered the stock's overly inflated valuations and prices, offering investors with a minimal margin of safety as things may remain volatile until negotiations conclude.
- We believe that the Skydance asset sale may be more likely than a WBD merger, with market analysts projecting an approximate Studio valuation of $18.2B.
- This estimate alone way exceeds PARA's current market capitalization of $10B, allowing the management to unlock significant value for its existing shareholders, with the sum of its parts greater than the whole.
We previously covered Paramount Global ( PARA ) in September 2023, discussing its shaky profitability despite the dividend and headcount cuts, worsened by the sustained cord-cutting post-COVID.
Despite the ongoing SAG-AFTRA/WGA strike and the subsequent reduction of content spend, the media company still failed to generate positive Free Cash Flow, putting further pressure on the viability of its investment thesis. This resulted in our hold rating then.
In this article, we shall be discussing the rumors surrounding PARA's supposed merger with Warner Bros. Discovery ( WBD ) and/or asset sale to Skydance, with things seemingly hanging in delicate balance.
With more uncertainties ahead, it remains to be seen if PARA is able to hold on to its recent gains, with us preferring to continue rating the stock as a hold (Neutral) here.
PARA Investors May Want To Tread With Caution Here
We believe that many readers have read of the supposed rumors of PARA seeking a potential merger and/or spin-off, with us believing the former to be highly unlikely and the latter to be more prudent.
This is why.
A PARA & WBD Merger Rumor Does Not Make Sense To Us
This choice seems relatively far-fetched, since WBD remains highly indebted with $43.49B (-1.7% QoQ/-10.5% YoY) of debts on its balance sheet as of FQ3'23, with Zaslav unlikely to raise capital to fully acquire PARA at a time when interest rates are still elevated.
Even if WBD eventually opts for a merger, the nature of a potential stock swap transaction may not be welcomed by its shareholders after the highly dilutive demerger from AT&T ( T ) after all.
If anything, we believe that regulators are unlikely to approve this mega deal, given the consolidative nature of the merger on the cable/streaming markets and the potential anti-competitive oppositions from multiple media companies, including Comcast ( CMCSA ), Disney ( DIS ), and Charter ( CHTR ), amongst others.
Both PARA and WBD may have to shed much of their existing offerings to push the deal through, while working with their cable/streaming competitors on multiple concessions, as how we have observed with Microsoft's ( MSFT ) eventual Activision ( ATVI ) acquisition.
Even so, the new PARA/WBD company may continue to face immense debt headwinds at a time of elevated interest rate environment, based on their overall debt load of $59.1B and annualized interest expenses of $3.2B by the latest quarter.
With an overall annualized EBITDA of $12.2B and annualized Free Cash Flow generation of approximately $3.9B, it appears that the new company's deleveraging process may be painfully prolonged, with dividend payouts highly unlikely.
While there may be content synergies from the combined PARA/WBD company, we believe that there may be little near-term benefits in combining the two together, with the related merger/restructuring costs and subsequent write-downs likely to be astronomically attributed to the scale of their operations.
Asset Sales May Be A More Prudent Choice For PARA
For now, PARA has managed to improve the monetization of its streaming segment, with FQ3'23 revenues of $1.69B ( +1.8% QoQ / +38.5% YoY ). It is apparent that its D2C offerings remain attractive, attributed to the recent subscriber growth to 63M (+2.7M QoQ/+17M YoY) despite the pricing increases for Paramount+.
Readers must also note that its growing D2C revenues are mostly attributed to the recent pricing hikes along with subscriber growth, since the segment's advertising revenues remain minimal at $430M (-2.4% QoQ/+18.4% YoY) as more competitors introduce ad-supported tiers.
On the one hand, for so long that PARA is able to grow subscribers ahead, we may see its D2C OIBDA margins improve ahead, from the -14% reported in the latest quarter (+11.4 points QoQ/+13.9 YoY).
On the other hand, PARA's legacy TV Media segment remains the backbone of the company, with it subsidizing the unprofitable D2C segment and lumpy earnings from the Filmed Entertainment segment at -$49M (-1080% QoQ/-219.5% YoY) in FQ3'23.
As a result, we believe that Mr. Market has a right to be bearish, since the TV media segment's revenues have been consistently eroded to $4.56B (-11.4% QoQ/-7.6% YoY).
The sustained cord cutting post-pandemic is highly apparent indeed, with the departing advertisers triggering its TV Media's impacted advertising revenues of $1.7B (-12.3% QoQ/-13.7% YoY).
As a result of this trend, we believe that the PARA's supposed Studio Deal with Skydance may be prudent indeed, due to their long-term partnership on multiple movie blockbusters since 2009, including Mission: Impossible, Top Gun, Transformers, and Star Trek.
This may allow PARA to utilize the increased liquidity to fund the growth of its D2C ambition, while de-risking its balance sheet, with an approximate Studio valuation of $18.2B.
This is as per Citi analyst Jason Bazinet 's recent projections, with the overall company estimated to be worth $24.75B - with a share price of $38, and as per Trefis - with the TV Media commanding 73.6% of the company's market value.
This estimate alone way exceeds PARA's current market capitalization of $10B, allowing the management to unlock significant value for its existing shareholders, with the sum of its parts greater than the whole.
Only time may tell how things develop moving forward.
So, Is PARA Stock A Buy , Sell, Or Hold?
PARA 5Y Stock Price
For now, PARA has already rapidly broken out of its 50/100/200-day moving averages, with it appearing to retest its previous resistance levels of $15s.
However, it remains to be seen if it is able to sustain this upward momentum, allowing the stock to keep most of its recent gains while establishing $15s as its next support level, with its movement already stalling twice over the past two weeks.
PARA Valuations
For now, the recent recovery has propelled PARA's FWD EV/EBITDA valuation to 10.92x and FWD P/E valuations to 28.48x, way ahead of its 1Y mean of 10.24x/17.68x, 3Y pre-pandemic mean of 8.97x/10.60x, and sector median of 8.68x/15.61x, respectively.
The Consensus Forward Estimates
PARA's FWD valuations are inflated indeed, if we are to take into account the consistently lowered forward estimates thus far, with the media company expected to generate an underwhelming top and bottom line growth at a CAGR of +1.8% and -3.8% through FY2025.
This is compared to the previous estimates of +3.41%/+12.2% and the historical growth of +13.1%/-0.5% between FY2016 and FY2022, respectively.
With PARA's share valuations/prices inflated by the rumors, we believe that current levels offer neither compelling growth nor dividend yields.
This is attributed to the fact that the stock offers a minimal margin of safety to its fair value of $18, based on the annualized FQ3'23 adj EPS of $1.20 (+200% QoQ/-23% YoY) and normalized P/E valuations of 15x.
Based on the recently declared $0.05 quarterly dividend , the stock also offers a minimal forward yield of 1.33% at the time of writing.
As a result of the potential volatility from the ongoing asset sale/merger negotiations, we prefer to maintain our Hold rating for the PARA stock here. Investors may want to keep a look-out ahead.
For further details see:
Paramount: More Uncertainties Ahead - Investors Should Remain Cautious