Paramount Global (NASDAQ:PARA), which changed its name and symbol on Feb. 15 from ViacomCBS and VIAC, now looks like a very good value play. PARA stock is up from its trough price of $27.85 on Feb. 22. By March 4, it had moved up to $34.07. But it could be worth more than this despite issues that surfaced in its latest earnings.
Paramount Global includes CBS (Sports and News), the Paramount Network streaming service (like Paramount Plus) and the Paramount movie studio. It also includes other channels and streaming networks like Showtime, PlutoTV, MTV, VH1, Nickelodeon, BET, Comedy Central and CMT.
Where Things Stand With Paramount Global
Investors are watching the company’s cash flow progress as seen in its latest earnings release on Feb 15. The slide deck shows cash flow from operations for continuing operations was $835 million in 2021. After capex spending of $354 million, its free cash flow (FCF) was $481 million.
The problem is this was significantly lower than in 2020. Last year, the company made $2.215 billion in cash flow from operations. After deducting $324 million in capex spending, FCF was $1.891 billion. A big portion of this nearly 75% decrease in 2021 (i.e., $481 million in 2021 vs. $1.89 billion in 2020) came from operating spending on “inventory,” or its movie and TV production costs.
However, Paramount Global likes to measure its cash flow using a different measure than free cash flow. It uses the acronym OIBDA, which is short for “operating income before depreciation and amortization.” This is a measure of earnings that excludes the huge non-cash expenses that come from depreciation and amortization of its TV and film libraries as well as production spending.
Last year its OIDBA was lower than in 2021, but not as much as the drop in FCF. For example, OIBDA fell to $4.444 billion, down 13% from $5.132 billion in 2020. (That is much better than the 75% decrease in FCF between both years.) Much of the decrease in OIBDA came from greater investments in its streaming service Paramount Plus.
However, its cable networks like Showtime still provide a huge portion of the company’s ongoing OIBDA. This will be the company’s bread and butter until streaming takes a larger percentage of revenue as more people “cut the cord” from cable TV.
What Analysts Say about PARA Stock
Barron’s wrote that investors don’t seem to like the new name and the company’s “doubling down” on its streaming strategy. The fear is this will push earnings growth out into the future and deny investors the ability to benefit from the company’s core cable TV channel cash flows.
The problem is management is doing what has to be done. It is pivoting away from its legacy TV and cable businesses, just as consumers are doing — at least in terms of distribution. This also requires huge investments in content, given the competition that is out there in the multi-channel streaming universe.
Bloomberg pointed out the company’s 32.8 million subscribers last year show its investments in streaming are starting to pay off. Its Paramount Plus service is now in direct competition with Netflix (NASDAQ:NFLX) and Disney‘s (NYSE:DIS) Disney Plus streaming service.
Bloomberg pointed out this was the first time the company had broken out its subscriber numbers for Paramount Plus. The company had previously reported a total streaming number that included Paramount Plus, Showtime and BET Plus.
According to Bloomberg, Paramount Global now has 56 million subscribers across all of its services. The company is confident enough in its streaming services that it upped its guidance, projecting 100 million subscribers by 2024.
What to Do With PARA Stock
TipRanks reports there are 17 analysts that have written on PARA stock in the last 12 months. As of Friday, March 4, their average price target was 20% higher than its price that day of $41.06 per share.
Other surveys show analysts seem to be very positive on the stock, despite the issues relating to its investments in streaming. For example, Yahoo! Finance, which reports the Refinitiv analyst survey data, indicates 24 analysts had an average price target of $40.06 as of March 4.
Similarly, Seeking Alpha has a survey that shows 27 analysts have a price target of $41.28 for PARA stock. That represents a potential upside of 21.1%.
So, despite the streaming cash flow issues, most analysts suspect this will lead to a higher valuation for Paramount Global. Value investors will probably follow their lead.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
