Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Paramount Global (PARA, Financial). The stock, which is currently priced at 15.23, recorded a gain of 2.02% in a day and a 3-month decrease of 4.74%. The stock's fair valuation is $32.94, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Paramount Global should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of 1.05. These indicators suggest that Paramount Global, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. Paramount Global's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview: Paramount Global
Paramount Global is the rebranded recombination of CBS and Viacom that has created a media conglomerate with global scale. CBS contributed Showtime in addition to its television assets--the CBS television network, 28 local TV stations, and 50% of CW, a joint venture between CBS and WarnerMedia. Viacom brought several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series. Paramount operates a number of streaming services, most notably Paramount+ and Pluto TV.
Analysis of Paramount Global's Profitability
Firstly, let's address profitability. One significant component of the F-Score is a positive return on assets (ROA). A closer look at Paramount Global's ROA reveals a worrying trend of negative returns. This indicates the company's inability to generate profit from its assets - a fundamental concern for any investor.
Let's delve deeper into Paramount Global's financial health by examining the decline in its return on assets (ROA) over the past three years. The data indicates 2021: 6.36; 2022: 6.05; 2023: -2.05, when expressed in percentages. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in Paramount Global.
Observing the financials of Paramount Global, it's important to note that the cash flow from operations over the trailing twelve months (TTM) stands at $-773 million, whereas the net income in the same period is significantly higher at $-1165 million. The Piotroski F-score considers this discrepancy as a potential red flag. The rationale behind this is that a company's operating cash flow is a more direct and less manipulated measure of its cash-generating ability than net income. Net income, while important, is susceptible to accounting treatments and non-cash items which can distort the true cash profitability of the company. If a company consistently shows lower cash flows from operations relative to its net income, it could indicate that the earnings quality is poor and the company might have difficulties sustaining its operations or financing its obligations, a fact which could negatively impact its financial stability and investor confidence.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Examining Paramount Global's financial stability, there's a notable decrease in its current ratio over the past three years, as shown by the data 2021: 1.78; 2022: 1.47; 2023: 1.17, which is expressed as percentages. The current ratio is a key indicator of a company's short-term financial health, as it gauges the ability to cover short-term liabilities with short-term assets. A declining current ratio suggests that Paramount Global's liquidity and capability to manage immediate financial obligations are deteriorating.
Operating Efficiency: A Darker Picture
Examining the data provided: 2021: 662; 2022: 650; 2023: 651, it becomes evident that Paramount Global has seen an increase in its Diluted Average Shares Outstanding over the past three years. This trend signals that the company has issued more shares. While issuing additional shares can provide immediate capital for the business, it can also lead to the dilution of existing shares' value. This dilution occurs because the earnings of the company now have to be divided among a larger pool of shares, which could decrease Earnings Per Share (EPS). Consequently, if the company's earnings don't grow at a pace that matches or exceeds this share increase, it could lead to a reduction in the value perceived by existing shareholders, potentially impacting their investment returns. Hence, while additional share issuance may provide necessary capital, it is important to monitor its impact on shareholder value carefully.
Last but not least, concerning operating efficiency, the Piotroski F-score examines changes in gross margin and asset turnover. Regrettably, Paramount Global follows a discouraging trajectory with a decrease in gross margin percentage over the past three years, as demonstrated by the data provided: 2021: 40.41; 2022: 34.66; 2023: 24.80 (expressed in percentages). This contraction in gross margin suggests that Paramount Global is grappling with either an escalation in the cost of goods sold or dwindling prices - both of which are inauspicious indicators for profitability.
In terms of operational efficiency, another key indicator, Paramount Global has unfortunately reported a declining trend in asset turnover over the past three years, as evidenced by the data: 2021: 0.50; 2022: 0.52; 2023: 0.53 (expressed in percentages). Asset turnover measures how effectively a company uses its assets to generate sales, and a decrease in this ratio can indicate a drop in efficiency. This could be due to various factors, such as underutilization of assets or a decline in the market demand for the company's products or services. Consequently, this downward trend in asset turnover implies that Paramount Global may need to revisit its operational strategies to improve the utilization of its assets and boost its sales volume.
Conclusion
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for Paramount Global, its current score suggests potential troubles. Coupled with a low Altman Z-score and a declining trend in profitability and operational efficiency, Paramount Global appears to be a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before considering an investment in this stock.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
