Value-focused investors are constantly on the lookout for stocks priced below their intrinsic value. One such stock that deserves attention is Paramount Global (PARA, Financial). Currently priced at $14.44, the stock recorded a 1.97% loss in a single day, with a 3-month increase of 2.9%. According to its GF Value, the stock's fair valuation stands at $32.96.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from our unique method. The GF Value Line on our summary page provides an overview of the fair value at which the stock should be traded. This estimation is based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance.
If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
However, before making an investment decision, investors need to consider a more in-depth analysis. Despite its seemingly attractive valuation, certain risk factors associated with Paramount Global should not be overlooked. These risks are primarily reflected through its low Piotroski F-score of 2, and 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 at the lower end of this spectrum, indicating potential red flags for investors.
The Altman Z-score, invented by New York University Professor Edward I. Altman in 1968, 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 Snapshot: Paramount Global
Paramount Global is the rebranded combination of CBS and Viacom, creating a media conglomerate with global scale. The company operates several leading cable network properties, produces original motion pictures, and operates several streaming services, most notably Paramount+ and Pluto TV. Despite its strong presence in the media industry, its stock price is significantly below the GF Value, indicating a potential undervaluation.
Analysis of Paramount Global's 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.
Paramount Global's financial health is further complicated by the decline in its return on assets (ROA) over the past three years. The data indicates a decrease from 6.36% in 2021 to -2.05% in 2023. 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.
Lastly, 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. The declining ROA, discrepancies between cash flow from operations and net income, decreasing current ratio, increasing diluted average shares outstanding, and declining gross margin and asset turnover all point towards a potential value trap. Therefore, despite the apparent undervaluation of Paramount Global's stock, investors should exercise caution and conduct thorough due diligence before investing.
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