Investidea: Paramount Global, because Yellowstone

Инвестидея: Paramount Global, потому что «Йеллоустоун»

Today we have a moderately speculative idea.: take shares in media conglomerate Paramount Global (NASDAQ: PARA), in order to capitalize on the rebound of these stocks after a strong fall.

Growth potential and validity: 18% behind 2 years excluding dividends; 7% per annum, taking into account dividends for 15 years.

Why stocks can go up: because it's an interesting business, albeit not without problems.

How do we act: we take shares now by 29,56 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

Paramount Global is a media conglomerate with its own cable channels, film production and streaming services.

We have already published a successful investment idea for this company, when it was still called ViacomCBS, and there is a very detailed description of her business. But now, in light of the company's reorientation to the streaming segment, we will make a new review, in order to have a better idea of, how it works.

According to the annual report, the company's revenue is divided as follows:

  1. Advertising - 32%. It's not just Paramount+, but also other streaming services of the company: Pluto TV, Showtime OTT, BET+ и Noggin. It should be noted, that in this segment the company's revenue from advertising on its streaming services is not calculated.
  2. Relay - 29%. That, what Paramount receives from different companies for the right to show its cable channels.
  3. Streaming - 15%. Subscription is 51,15% segment revenue, where users are charged for Paramount +. Ad revenue on free services like Pluto is 48,85%.
  4. Cinemas - 1%. That, what the company earns from the release of its films in the cinema.
  5. Licensing and more 23%. That, what the company gets from selling and displaying its content on other platforms.
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Revenue by country and region is divided as follows: 80,81% — USA, 19,19% - other, unnamed countries.

Arguments in favor of the company

«Let the world call me a fool, but if things are right with me and you…» The company's shares fell sharply amid its reorientation to streaming - from 35.99 to 29,56 $. We talked about this story in the latest issue of investment news.. I think, that not everything is so scary and we can hope for a rebound in shares.

Инвестидея: Paramount Global, потому что «Йеллоустоун»

Sheridan will call. I believe, that Paramount's collaboration with Taylor Sheridan will attract a large number of new subscribers to the company's streaming services. Actually, the company is already overfulfilling the plan to attract subscribers.

Sheridan on Paramount+ fills an interesting niche in the US: by the standards of the mainstream left-liberal discourse, he makes conservative reactionary content. Think, that in the face of the polarization and division of American society, Paramount will be able to attract a very large number of subscribers. And outpacing growth in the streaming service could bring back shareholder enthusiasm. And they can also lead to a buyer's company, about what below.

Will be asked to sell. Taking into account all the weak points of the company, as well as its acceptable price - capitalization of 19.32 billion, P / S — 0,67, P / E considering the results of the company's operations alone 8,49, - I would expect, that an activist investor will appear, which will require the sale of the company. His, probably, supported by the majority of shareholders.

And I think, a buyer for the company can be found: it is an interesting combination of both traditional, and new media. She doesn't look overrated.. It may well be bought by the same Disney in order to expand to more "adult" markets.. Disney already has an "adult" FX channel - "Sons of Anarchy", American Horror Story and so on - it may well combine Paramount media assets with it and make a service separate from Disney +.

Awesome Kinzo. Spider-Man's success on, in fact, "pre-pandemic level" allows us to hope, that this year Paramount is waiting for good fees in the cinema. She is just preparing to release a number of films from popular series: "Mission Impossible", "Top Shooter" and so on. If, certainly, a new strain of coronavirus will not spoil the situation. Cinema is not the main business for the company, but still, the success of new films may slightly improve the results in the company's reporting.

  Contradictory picture.

Pasture of passive income. The company pays 0,96 $ dividend per share per year, what gives 3,24% per annum, - this is much higher than the "average for the hospital": now dividend yield S&P 500 is 1,38% per annum. ViacomCBS had an image in the eyes of investors as a "stable, reliable business" - I think, that this bonus will continue in the eyes of investors after the transformation of the company into Paramount Global. So,, we can expect an influx of investors into these stocks.

What can get in the way

«I can still hear you saying „You would never break the chain“». As Chris Pine's character said in the movie "Any Cost", "Poverty is a disease, hereditary". So in the case of Paramount, her legacy pulls her to the bottom.. There are two main points, which have been bothering me ever since the first idea.

According to the latest report, 50% the company's revenue comes from cable channels. The adjusted operating margin of the cable segment is 26,38% from its proceeds. At the same time, cable TV in the US is constantly losing subscribers.. Paramount's main problem is the question of converting its cable TV users into a monetized audience of streaming services..

The effectiveness of TV advertising for customers is extremely non-obvious, so I'd be prepared for that, that the company's revenue under this item will fall - especially if the coronavirus crisis has a devastating impact on sporting events, from advertising on which Paramount receives a significant portion of the revenue.

Profit of the company, if you subtract a one-time profit from the sale of assets, gradually decreasing: in 2021 she was on 17% below, than in 2020. In my opinion, the state of the company in its current form can be described as "managed decline".

Инвестидея: Paramount Global, потому что «Йеллоустоун»

Инвестидея: Paramount Global, потому что «Йеллоустоун»

Streaming. Paramount Global management's efforts to develop a streaming service are commendable - but I'm afraid, that they are not part of a long thoughtful strategy. During the ViacomCBS days, the company suffered from a lack of attention from the founding Redstone family., who fought the clan's patriarch for control of his many assets.

I have a suspicion, that the decision to refocus on streaming was made by the management for reasons of almost the level of “well, Netflix and Disney’s shares of norms are growing from streaming, let's do something like that, and?». For that., for example, indicates that, what is Paramount's most popular series, "Yellowstone", absent from her streaming, because relatively recently she gave the right to stream the series to her competitors (sic!) из Comcast, who thus develop their streaming service.

Compare that, for example, with Disney, that takes away the right to Disney Marvel content from Netflix. Licensing revenue plays a big role in Paramount's business, but if she's going to enter the streaming race, then her decisions must be consistent.

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Meanwhile, the cost of developing the Paramount + streaming service will be very large.. For example, TV series "1883" cost the company 10 million per episode. Paramount+ won't be profitable for a couple more years. All this needs to be understood and accepted - and be prepared for that., that the company's profits will not only not grow, but it can even drop significantly.

Debt by payment is terrible. The company has an impressive amount of debt - approximately 35.5 billion, of which 9.479 billion must be repaid within a year. Basically, there is enough money at the disposal of the company to close urgent debts: 6,267 billion in accounts and 6.984 billion debts of counterparties.

The company spends on dividends 27,58% from profit - this is if we consider the purely operations of the company, excluding one-time non-core income. But numerous problems and rising costs may lead the company to consider, what does she, maybe, should cut dividends, which will cause stocks to fall.

Well, a large amount of debt in itself will scare away some investors, who are worried about the upcoming rise in the cost of loans.

Unrighteous Redstones. The family of Paramount founder Redstone has a majority stake in the company - which implies the likelihood, that it can make decisions, which will not be in the interests of minority shareholders like you and me. Or that family members will quarrel with each other - and this will not be slow to affect quotes.

Rehearsal costs. Culture Wars, which led to the rise of Sheridan, may lead to his downfall.: some scandal could negatively affect his career. And this may affect Paramount quotes: it is Sheridan who acts as the main generator of exclusive content for the company's streaming service.

Also, maybe, in the future, the company will have to spend money on retaining Sheridan: Who knows, maybe, the success of his series will lead to, that Netflix will try to lure him over.

What's the bottom line?

Shares can be taken now by 29,56 $. And then there are two options.:

  1. hold shares until 35 $. Think, here it is better to focus on a period of two years;
  2. hold shares 15 years, while the company turns into a full-fledged streaming business. Or, which is more likely, successfully finds a buyer.

You should also look at the news section of the company's website. If dividends are canceled or reduced, it will be possible to sell the shares before, How will investors react to this sad news at St. Petersburg Exchange?.

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