Paramount Global (PARA, Financial) was a little late to the streaming war and still has a debt load over $17 billion, which has been weighing on its valuation considerably.
If you put debt aside, the company is generating north of $30 billion on the top line and nearly $3 billion on the bottom line and pays out 5% of its earnings, but it is priced at 4 times, or $12.5 billion. That does not make a lot of sense, which could be why its largest shareholder is Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) - the king of value investing. Given the fact Paramount still has a strong competitive advantage with live sports and original programming, and continues to grow its streaming business, the stock looks relatively cheap at $19 a share.
In 2019, CBS Corp. and Viacom reunited into a single company known as ViacomCBS. It has since rebranded as Paramount Global, a collection of cable networks with global distribution, production studios and an expanding library of content.
Paramount Pictures has a film library of 2,500 movies and a number of television networks, including CBS, Comedy Central, MTV, Nickelodeon, VH1 and BET. It has the top-performing film of the year, "Top Gun: Maverick," which brought in nearly $1.5 billion worldwide in 2022. It also has the highly-rated TV series "Yellowstone," now on its fifth season.
Its CBS segment has a diverse portfolio of sports rights, including the NFL, college football, college basketball and the PGA Tour. Live sporting events remain one of the few types of programming that have not been significantly impacted by DVR or time-shifted viewing and continue to attract viewers aged 18 to 49, a desirable demographic for advertisers. In 2021, 61 of the 100 most watched telecasts were sports, with NFL games making up eight of the top 10.
This combination of popular original programming and exclusive sports rights should enable Paramount Global to continue increasing its revenue from retransmission fees and reverse compensation.
Paramount Global's financial performance is expected to suffer in 2023 due to rising costs, the loss of Super Bowl 55 to Comcast's (CMCSA, Financial) NBCUniversal and the loss of SEC games to Disney's (DIS, Financial) ESPN. Additionally, the increased investments in its direct-to-consumer segment will drag down margins in the short term. CBS has secured the rights to air NFL games on Sunday afternoons until 2033, and while losing the SEC in 2023, it holds rights to air UEFA Champions and Europa League soccer matches, which have been more popular in the last several years. The need to acquire more streaming rights, along with increased competition for sports rights, may lead to Paramount overspending and potentially impacting margins in the initial years of any deal.
That said, the growth should eventually offset the decline of its legacy cable programming business, which has seen advertising weakness from continued cord cutting.
Paramount Plus competes worldwide with platforms backed by much larger companies, many of which have considerably more spending capacity. This relative lack of spending will hinder its ability to gain and retain subscribers. However, the company's streaming revenue growth has already outperformed competitors such as Disney and Netflix (NFLX, Financial), and the company's plans for new content, improved offerings and international expansion all have the potential to significantly increase revenue and profits long term.
Also, compared to the two industry leaders, Paramount is a steal. Disney has a market cap of $170 billion with revenue of $82 billion and lower margins. Further, it has $52 billion in debt and just $11 billion in cash. Netflix generates $32 billion a year in revenue, slightly more than Paramount, and has slightly better profit margins, yet with $16 billion in debt and a market cap of $140 billion. Based on these metrics, Paramount should have a market capitalization north of $50 billion.
Even though the way people access content has changed, Paramount still has a pretty solid economic moat due to the increasing value of its existing video content, and pay-TV is still popular with roughly 60% of U.S. households. The bottom line is there will always be a demand for high-quality programming, and content creation is not a zero-sum game.
So while concerns about declining linear assets are justified, Paramount DTC business will likely be successful on, ultimately competing with larger platforms by converting its current reach. Its greatest advantage in doing so is CBS, which reaches 120 million households in the U.S. and where it produces or co-produces 80% of the prime time programming via its own CBS Studios.
How much longer will the stock stay undervalued? If the company trades at an average multple of 15 times earnings, it would be priced in the $40 to $45 range based on $3 per-share earnings in 2023. In a decade, those earnings could be twice that, putting the value of Paramount at nearly 5 times what it is today. The other metric would be book value per share, which is currently hovering round $35. Netflix is priced at 6.8 times book, while Disney is priced at 1.8 times book. If Paramount were priced similiarly, it would be trading in the $60 range.
