On August 6, 2023, Paramount Global (PARA, Financial) saw a daily gain of 3.58%. Despite this positive movement, the company reported a Loss Per Share of $0.78. This article aims to answer a pressing question: Is Paramount Global's stock a potential value trap? Let's delve into an exhaustive valuation analysis of Paramount Global to uncover the answer. We encourage you to read on for a comprehensive understanding of the company's financial standing.
Company Overview
Paramount Global, previously a recombination of CBS and Viacom, is a global media conglomerate. CBS contributed Showtime and its television assets, including the CBS television network, 28 local TV stations, and a 50% stake in CW, a joint venture with WarnerMedia. Viacom brought along several leading cable network properties, such as Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Paramount Pictures, a subsidiary of the company, produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series. Paramount operates several streaming services, most notably Paramount+ and Pluto TV.
At a stock price of $15.63, Paramount Global (PARA, Financial) is currently trading below its fair value (GF Value) of $33.2. The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
GF Value of Paramount Global
The GF Value is a unique measure of a stock's intrinsic value, calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Our analysis shows that Paramount Global (PARA, Financial) appears to be a possible value trap. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns. At its current price of $15.63 per share, Paramount Global's stock appears to be a possible value trap.
Financial Strength of Paramount Global
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company.
Paramount Global has a cash-to-debt ratio of 0.12, which is worse than 85.21% of companies in the Media - Diversified industry. GuruFocus ranks the overall financial strength of Paramount Global at 4 out of 10, indicating that the company's financial strength is poor.
Profitability and Growth of Paramount Global
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Paramount Global has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $30.1 billion and a Loss Per Share of $0.78. Its operating margin is 2.47%, which ranks worse than 52.36% of companies in the Media - Diversified industry. Overall, GuruFocus ranks the profitability of Paramount Global at 7 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Paramount Global is 2%, which ranks better than 56.22% of companies in the Media - Diversified industry. However, the 3-year average EBITDA growth rate is -18.9%, ranking worse than 78.91% of companies in the Media - Diversified industry, indicating poor growth.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Paramount Global's ROIC is 1.14 while its WACC came in at 6.98.
Is Paramount Global a Value Trap?
Despite the signs of potential undervaluation, there are several risk factors to consider. Paramount Global has a Piotroski F-score of only 2 out of a possible 9, suggesting potential concerns. This low F-score may indicate a downward trend in critical aspects such as profitability, funding, and efficiency. Investors should look beyond the appealing low valuation and ensure there are no hidden long-term risks. To better understand the Piotroski F-score and its role in measuring a company's business trend, please click here.
Furthermore, the Altman Z-score for Paramount Global stands at 1.08, placing the company's financial health in the distress zone and signalling an increased bankruptcy risk. Ideally, an Altman Z-score above 2.99 reflects a safer financial position. The Z-score, particularly relevant for manufacturing companies, considers various factors such as profitability, leverage, liquidity, solvency, and activity ratios. To further comprehend the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
Overall, Paramount Global (PARA, Financial) stock appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 78.91% of companies in the Media - Diversified industry. To learn more about Paramount Global stock, you can check out its 30-Year Financials here.
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