Rising inflation and fears of recession dragged down the broader stock market, and World Paramount (NASDAQ: PARA) (NASDAQ: PARAA) is no exception. However, the multinational entertainment conglomerate is emerging stronger from the recent merger and the pandemic and is currently trading at a steep discount to its intrinsic value. Thus, the strong buy rating is based on the undervaluation of PARA with a significant margin of safety of 54.3% and offers unique medium-term play while paying a fair dividend.
PARA’s growth momentum
PARA had a strong start to the year, with the company’s overall gross revenue increasing 13% year-on-year in 2021, reflecting growth across all revenue streams. The growth was primarily attributable to an increase in the streaming advertising revenue segment. Additionally, advertisements on streaming services and revenue from streaming subscriptions have significantly increased the company’s revenue. Specifically, streaming revenue saw an annual increase of nearly 64%, with growth across all of the company’s streaming services.
Favorably, advertising services increased by 11%, mainly due to CBS broadcasts of the NCAA tournament, which was canceled in 2020 due to the pandemic. In addition, affiliate revenue increased nearly 5%, driven by expanded distribution for national cable networks and growth in royalties received from television stations affiliated with the CBS television network. Finally, despite being the smallest revenue segment, theatrical revenue increased by 34% due to a higher number of theatrical releases in 2021, but this is still below pre-Central levels. pandemic when they hit $547 million, or about 2% of total 2019 revenue.
According to the company’s first quarter 2022 earnings press release, the company demonstrated continued momentum in Direct-to-Consumer (DTC) services, supported by the addition of 6.8 million Paramount subscribers. + in the quarter, reaching 62 million global streaming subscribers. At the same time, the company’s family of networks recorded top viewing share, with CBS being the most-watched broadcast network for the 14th consecutive season.
Finally, Paramount Pictures had a phenomenal start to the year with several box office successes during the quarter; Scream, Jackass Forever, The Lost City, Sonic The Hedgehog 2 and Top Gun which reached an exceptional milestone of $887.6 million worldwide. Remarkably, PARA has seen tremendous growth, reporting 27 million registrations covered by US antennas in 2021, surpassing all other streaming peers.
Powerful brand network and competitive advantage
PARA is on track to achieve its long-term goals and has shown strong momentum in its business empire, from fast-growing streaming services to highly weighted TV shows and top box office movies. The company’s broad content, diverse streaming business model, wide range of platforms and global operational footprint suggest compelling growth in the years to come.
Among the differentiators that set the company apart is its international reach. PARA is a truly global operating company with professional setups in over 30 markets and a number of studios around the world creating original content. This international presence with an extensive portfolio of cable networks, a larger library of content and a strong network of brands is undoubtedly a powerful competitive advantage.
By the end of the year, the company’s combined premium SVOD services, including Paramount+ and Sky Showtime, will be available in more than 60 markets with more than 60 partners worldwide. Likewise, the expansion of Pluto’s streaming service globally will further support the monthly active user base. Additionally, the company’s long-term model targets DTC margins and is bullish on its long-term goal of reaching over 100 million DTC subscribers globally and generating at least $9 billion in revenue. by 2024.
Favorable earnings outlook with normalization
PARA has significant growth ahead; its extensive content offering is proven, the dual revenue model attracts subscribers, its content investments generate returns, and the global footprint provides strategic and financial advantages. Consequently, the Overall net income from continuing operations attributable to PARA increased 90% in 2021. Similarly, diluted EPS also increased from $3.73 to $6.69 per share, reflecting a 79% year-over-year increase.
However, the LIFO growth figure mentioned above also includes the impact of extraordinary one-time items, primarily the massive real estate gains of $2.34 billion, which, if excluded, the LIFO adjusted shows a decrease of 17%. Nonetheless, despite recession fears and current headwinds, the earnings outlook remains favorable, but a mean-reverting normalization is inevitable.
The rewards outweigh the risks
In the world of media and entertainment, unpredictable risks and uncertainties may cause actual performance and results to differ from expectations. Risks include PARA’s inability to maintain its existing attractive brands and reputation in the global marketplace. In addition, most electronic media companies are threatened by changing consumer and audience behavior, changing technology and changing distribution platforms. Therefore, if audience expectations are insufficient and underperforming, ad revenue growth will be stunted. Additionally, since 40% of PARA’s total revenue is generated by advertising, the company remains vulnerable to advertiser sentiment and spending, as well as a potential economic downturn.
In addition, there are underlying risks in PARA’s endless investments in new businesses, products, services and technologies through acquisitions and other strategic initiatives. Additionally, larger competitors such as Netflix (NFLX), Disney (DIS), and Apple (AAPL) have much larger spending budgets and networks to accumulate and maintain a massive subscriber base.
From a valuation perspective, using a conservative and achievable growth rate of 8% for the next five years as well as a terminal growth rate close to the normalized rate of inflation of 2%, the baseline DCF model suggests a fair value of $56, implying a potential upside of 119% from current levels. Therefore, despite some company-specific risks, PARA stock remains attractive at current levels and offers a favorable risk/reward profile.
Finally and above all,Despite PARA’s cheap valuation with a P/E multiple of just 4.2, investors also benefit from a fair dividend yield of 3.9%. Over the past two years, the cThe company declared total dividends per share of $0.96, giving total annual dividends of $625 million and $601 million for 2021 and 2020, respectively. Thus, it is reasonable to expect the payout ratio to increase in subsequent years in light of improving margins, supporting higher total returns for investors.
Following the Viacom/CBS merger, Paramount Global has become a renowned powerhouse with a strong portfolio of premier cable networks, strong brands with a global footprint and a growing content library. With the current growth momentum, particularly in streaming revenue, PARA remains undervalued and offers an attractive entry point with a fair dividend yield.