Mario Gabelli (Trades, Portfolio) is a billionaire investor with a net worth of approximately $1.7 billion according to Forbes. He is the founder and CEO of GAMCO Investors, an investment firm with $30.7 billion in assets under management.
The guru is known for his bottom-up investing style and his expertise in the media industry. During the second quarter, he increased his stake in Paramount Global (PARA, Financial)(PARAA, Financial).
About Paramount Global
Paramount Global is an international media giant that owns CBS, Comedy Central, Channel 5, MTV and many more entertainment brands. CBS was the most watched broadcast network in 2022, with 5.14 million viewers in the U.S., along with the other leader NBC, according to data from Statista. Its Comedy Central business includes a number of iconic shows, such as "South Park" and "The Daily Show," which has won 24 Primetime Emmy Awards and is the longest-running show on the network, having been hosted by both Jon Stewart and Trevor Noah.
Another popular show on Comedy Central is "Futurama," which was produced by Matt Groening, the creator of "The Simpsons."
Movie studio moat
Paramount Pictures is one of the worlds leading movie studios and owns the rights to a range of iconic movies and film franchises, including "Forrest Gump," "The Godfather," "Iron Man," "Mission Impossible," "Titanic" and "Transformers."
The beauty of owning these movie rights is Paramount can continually film remakes or new installments every few years, benefitting from a long-term cash cow. For example, "Top Gun: Maverick," was the highest-grossing U.S release in 2022, generating a staggering $719 million in ticket sales. The "Mission Impossible" franchise has released seven movies so far, with “Dead Reckoning” released in 2023 and another movie planned for 2024.
Paramount also owns the partial rights to the legendary "Indiana Jones" franchise with Walt Disney Co. (DIS, Financial).
More recently, the company has acquired a number of Spanish-speaking series and movies in order to expand into this lucrative market given it is the fourth most popular language in the world.
King of streaming
Paramount was also early in the launch of its streaming service “Paramount+” in 2014, which was originally called CBS All Access.
In 2021, this was accelerated to 25 markets and in 2022, the service launched in the U.K., Europe and South Korea.
Paramount Plus was rated as the fifth-most popular streaming service in the U.S., with around 32% of the consumers surveyed paying for the platform, according to Statista data.
Steady financials
Paramount reported steady financial results for the second quarter of 2023 on Aug. 7. Its revenue of $7.62 billion beat analyst forecasts by $167.24 million, despite declining 2% year over year.
Breaking this down by segment, affiliate and subscription revenue saw solid growth of 12% in the second quarter. This was driven by Paramount's combination of traditional TV and streaming.
Its direct-to-consumer subscription revenue exploded upwards by 47%. This was, of course, driven by Paramount Plus, which is is rapidly gaining users across new markets. This, along with an increase in average revenue per user, was also enchanced by the bundle partnership with Showtime.
In the third quarter, management is expecting a loss of 1 million subscribers related to a legacy Latin American bundle deal. However, this is expected to have minimal impact on revenue, which is good.
The company has also discovered a strong retention pattern. If a user watches four hours or more or content per month and engages with over two different series, they are 30% less likely to churn.
Moving on to advertising, the channel reported a a surprising 150% uptick sequentially, despite challenges year over year due to the macroeconomic environment. Long term, management is bullish on growth prospects of its advertising business. During the second-quarter earnings call, management reported momentum in areas such as retail, pharmaceuticals and travel. However, linear TV advertising is expected to recover at a slower pace.
As for movies, Paramount reported a surprising decline in revenue year over year. However, this was driven by a tough comparison due to the huge success of "Top Gun: Maverick" last year. Further, the company reported a $5 million boost in operating income before depreciation and amortization due to the timing of licensing deals.
Margins and balance sheet
Paramount had a tough quarter with regard to profitability as it recorded a 46% decline to $459 million. However, non-GAAP earnings per share of 10 cents topped estimates by 12 cents.
The company has $1.7 billion in cash and short-term investments on its balance sheet. Total debt amounts to just over $17 billion, of which a majority is long term. In general, high debt is expected for a legacy media company that has been through multiple mergers.
Billion-dollar KKR transaction
Earlier this month, Paramount announced plans to sell its publishing business Simon & Schuster to KKR & Co. Inc. (KKR, Financial) for a staggering $1.62 billion. I believe this is a solid strategy given the unrelated nature of the publishing company to its core business. This will also deliver a 0.5 times improvement in net leverage, as the proceeds can help to pay down some of the aforementioned debt.
Valuation
Paramount trades with a price-sales ratio of 0.33, which is lower than its five-year average.
The GF Value Line also indicates a fair value of $32 per share, so the stock is undervalued at the time of writing. There is also the risk of a value trap, which I am not worried about.
Guru interest
During the second quarter, the guru's firm loaded up on 457,501 Class A shares and 27,037 Class B shares.
During the quarter, the Class A stock traded for an average price of $20.84 per share, while Class B shares were trading around $18.13. Both have fallen since that point, which is good news for potential investors.
Final thoughts
Paramount is a strong company with a true competitive advantage thanks to its movie rights and franchises. Moving forward, management plans to focus on three key pillars: strong content, multi-platform and multi-content monetization. Improving economics in the streaming service is expected to drive profitability improvements by 2024.
