- Buffett’s Position is Down Close to 60%
- Streaming Business is still in transition
- Huge One-Off Losses from Programming Charges of 2.4 billion dollars
- An Interesting Turnaround Play
Paramount has been on a downward spiral since the start of 2021. Even Warren Buffett’s endorsement and investment does not aid in slowing the decline. Berkshire Hathaway, as of this write-up, has a 15.4% stake in Paramount which makes it the biggest shareholder.
Based on Barron’s estimate, Berkshire got their Paramount stake (93 million shares) at an average price of close to $30. Based on the current price of $12.5, Buffett is down by close to 60%.
The boiling question will be:
Is Paramount going to be Warren Buffett’s Greatest Investment Mistake?
Video Streaming Industry Growth
Source: Statista
We have no doubt the streaming business is an extremely competitive industry. Only Netflix is able to churn out profits at this juncture.
Also, to keep consumers engaged, new content has to be regularly created in order to prevent subscribers from leaving their streaming network. So all these will require massive investments, not unlike the airline business. Amazon has budgeted 15 billion dollars on content creation for 2023.
Statista estimates that the revenue in the Video Streaming (SVoD) market is projected to reach US$95.88bn in 2023. Revenue is expected to show an annual growth rate (CAGR 2023-2027) of 9.47%, resulting in a projected market volume of US$137.70bn by 2027.
Grand View Research is more optimistic and is projecting an annual growth rate of 21.5% till 2030.
Source: FlixPatrol
Looking at the subscriber numbers, there is lots of room to grow for Paramount as they are currently in 7th position. With the combination of Paramount+ and Showtime, it would make it a more enticing package for consumers to onboard to Paramount’s streaming offer.
However, we are of the view that consolidation is likely as there are just too many players. With the price war to gain market share, it will hurt the bottom line and only the fittest will survive. This explains why only Netflix is able to net a profit, likely due to their economies of scale.
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Paramount Financial Ratios
| Stock | Paramount | Disney | Netflix |
| Price Earnings (Forward) | 27 | 22 | 32 |
| Price Book | 0.39 | 1.49 | 7.3 |
| Price Sales | 0.28 | 1.7 | 5.2 |
| Debt to Equity | 72% | 48% | 63% |
| Return on Investment | NA | 2% | 8% |
| Current Ratio | 1.2 | 1.07 | 1.3 |
| Dividend Yield | 1.56% | NA | NA |
| Price/Market Cap | $12.5/ $8.3 billion | $81/ $150 Billion | $380/ $168 billion |
Source: Reuters
Looking at the financials with a comparison to Disney and Netflix, what stands out is that Paramount is trading way below book value.
Paramount Pictures’ library consists of more than 1,000 films, including such classics as the Star Trek, Godfather, and “Indiana Jones franchises. They also include Academy Award-winners Braveheart, Forrest Gump, and Titanic. Recent current favourites include Top Gun, Mission: Impossible and Transformers franchises.
With such impressive Intellectual Property Assets, we would deem their goodwill and intangible assets to carry weight and have genuine value. Hence, even if there is an impairment, it should not be too drastic.
In showbiz, ‘Content is King’, so if this saying still holds, the turnaround of Paramount is very likely after they navigate their current crisis.
There was a huge charge for programming costs that have turned into financial losses for the year for Paramount. It is due to a restructuring where they combined both their streaming services (Paramount+ and Showtime) into one.
Their debt to equity is at 72% which is high but not extreme. Once they turn profitable in 2024 without the one-off restructuring charge, they should be able to handle their debt obligations.
Combination of Paramount+ and Showtime
Source: Paramount Q2-23 Earnings Release
There was an obvious eye-sore in the 2023 financials, and that was the $2.37 billion programming charge. This charge as explained by the management is for removing content from platforms, abandoning development, and terminating contracts.
Both streaming services were officially merged on June 27 2023. Hence, we do not foresee further charges going forward but that is our presumption.
The management is of the view that there could be $700 million in savings from this merger but Wells Fargo analysts put the number at $300-$400 million.
If we do not factor in the programming charges, the profit for the half year 2023 will be close to 950 million. It would be an increase of 11.7% to the first half of 2022. Nonetheless, their results fall short of analyst expectations without considering the one-off programming charges.
We will be monitoring if further programming charges are being locked in for the next 2 quarters.
Hollywood Strikes
There has recently been a strike for both screenwriters and actors. It has lasted for 150 days.
The writers have ended their strike a few days back. They have negotiated minimum wages and also better residuals from their work in streaming content.
The actors are still on it and we have no idea when it would be ending.
This is also one of the factors weighing down the stocks of streaming-related companies.
Streaming Loss and Cable Being Obsolete
Paramount Business is split into 3 main divisions. They are TV Media (Cable and TV), Direct-to-Consumer (Streaming) and Filmed Entertainment (Movies).
For HY 2023, the only cash cow would be the TV media business. They generate an operating income of $2.5 billion but it is still a drop of 15% for HY 2022.
Will cable stay relevant and not turn obsolete?
There is no doubt that cable is on a downtrend as family subscriptions for cable in the US have dropped from 47% in 2019 to 42% in 2022.Â
Perhaps the card to retain subscribers would be the sports program. Paramount holds the rights to the NFL, PGA, Champions League etc.
The streaming business saw a healthy growth of 40% in revenue but they are still bleeding cash. The loss of HY23 is $935 million which is slightly more than the loss in HY22.
However, a pivot to streaming is necessary given their core TV media business is on a secular downtrend. Perhaps, they would start turning profitable once the economies of scale come into play. They are targeting 100 million subscribers by the end of 2024.
As for filmed entertainment, Paramount is nursing a loss of $93 million for HY23, as compared to a profit of $144 million in HY22. Top Gun: Maverick was the trump card for the 2022 financial performance.
Financial Situation- Debt
Looking at the debt of Paramount, the bonds for their different business are issued at coupons ranging from 3.4% to a high of 7.8%. The maturity date ranges from 2025 to 2062.
Paramount have $15.8 billion of debt. Their cash holdings are at $1.7 billion. There is likely further influx through the ongoing sale of their publishing arm, Simon & Schuster, estimated at $1.6 billion.
There was also talk about the sale of their BET cable channel for $2 billion. This deal did not materialize as Paramount decided not to go ahead with the sale.
The estimated interest expense is $900 million a year. Taking the recent financial performance without the programming charges, and extrapolating the HY2023 results, Paramount could potentially be earning $1.9 billion a year. This gives us an interest cover of slightly above 2.Â
This figure is not ideal but they are not in deep waters yet. They have taken the prudent decision to drastically reduce their dividends by 80% to strengthen their balance sheet.
Even if Paramount gets into a liquidity situation, we must not forget that its biggest shareholder is Warren Buffett. With $143 billion in cash to deploy, he could easily buy up the company with all the attractive intellectual property that comes along with it.
Alternatively, Buffett is known to do deals where the company would issue preference shares to him. He will get a good interest rate out of it. Warrants could also be structured into the deal to sweeten it. Buffett did it for Goldman Sachs in 2008, where he was issued preference shares at 10% with attached warrants.
Valuation of Paramount
As per our earlier analysis of their financials, we are of the view that the book value of Paramount should not see much impairment given the quality of their franchise and assets.
Hence, if there is indeed a sale of the whole business, it will be done at least close to its book value.
Given their current price of $12.50 and at a price to book of 0.4X, this would bring the target price to $30 which is equivalent to their book value.
A more viable target based on the current economic climate, 0.8X book would be more reasonable. That would be $25 which gives us a one-bagger potential.
Paramount Technical Analysis
Source: Investing.com
From the charting perspective, Paramount has broken the critical $15 support. The price action does not look promising. Any bounce should see resistance at $15.
We need a convincing break above $15 to have the price action in our favour. For now, we will be just bottom-picking and going against the trend.
Summing Up
Warren Buffett’s position is in the deep red zone as he is nursing a loss of 60%.
Will this be the worst investment for the Oracle of Omaha?
To be fair, the general market has not been performing well. Apart from Netflix, Disney and the other players in the streaming business are seeing decade lows.Â
Despite the challenging environment, with solid intellectual property assets, we are of the view that this would be an interesting turnaround play.
Moreover, they have the endorsement of Warren Buffett, who can be of great assistance if they do run into liquidity issues.
Trading at just a price-to-book of 0.4 with solid assets supporting the book value, we opined that they are now trading at an attractive valuation.Â
Not factoring in the one-off programming charges for 2023, Paramount is very much a profitable business with TV Media as a cash cow. They are pivoting into streaming as a survival move as cable is on a secular decline. We hope with scale, they are able to turn the tide and make streaming a profitable business division.
The price action is not ideal and we will need a convincing break above $15 to give us an indication of a potential change in trend.
In essence, we are of the opinion that Paramount should be on your shortlist. Current levels would entice value investors to take a closer look.
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The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
