How Low Can Paramount Go Amid Sale Rumors?
Wall Street has been selling Paramount Global as merger talks broke down, but the charts say a minor payday could await buyers.
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Paramount Global PARA sold off last week in response to reports that Shari Redstone's National Amusements had walked away from merger talks with SkyDance Media. The share price sold off daily from there as a belief spread across Wall Street that Redstone might pursue an outright sale of National Amusements, the majority owner of Paramount Global, rather than seek a merger with another company.
Paramount Global includes Paramount Plus, Paramount Pictures, Paramount Television, CBS, CBS News, CBS Sports, BET Media Group, MTV, VH1, CMT, Showtime, Nickelodeon, Pluto TV, and plenty more, so this firm has created quite a large infrastructure.
Both Sony SONY and Apollo Global APO had reportedly shown interest in making runs at Paramount Global, but both had supposedly backed off as of late May, with word that maybe one of the two or both might only be interested in acquiring certain assets from within Paramount rather than the entire company. PARA ended May as one of the S&P 500's most heavily-shorted stocks with 11.25% of the entire float held in short positions.
Earnings
Paramount won't be reporting until late July. For the current or second quarter, the street is looking for an adjusted EPS print of $0.13 or a GAAP print of $0.10 on revenue of $7.3 billion. That number for sales, if realized, would amount to a year-over-year contraction of almost 5%. Of the 21 sell-side analysts that we can find that cover PARA, 13 have reduced their estimates for the firm's profitability since the quarter started.
For the first quarter, which was reported in late April, Paramount posted an adjusted EPS of $0.62, which easily beat expectations, but a GAAP EPS of $-0.87, which is something the street did not see coming. Revenue for the quarter was $7.69 billion, which fell short of consensus view despite being good enough for year-over-year growth of 5.9%. The majority of the adjustment made (1.28) was made in connection to a charge taken for strategic decisions to change programming content. Cysts are related to programs that were put to a halt and agreements that had to be terminated.
The Books
For that March quarter, Paramount Global generated $260 million in operating cash flow, and spent $51 million on capital expenditures. This left free cash flow of $209 million, which is not so bad. Out of that number, the firm paid out $49 million in cash dividends to shareholders.
At that time, Paramount had $2.384 billion in cash on the books and $892 million in inventories. This put current assets at $11.932 billion (mostly in receivables). Current liabilities added up to $9.224 million that included almost no debt and unearned revenue of $671 million. That works out to a better than bad current ratio of 1.29. Once adjusted for deferred revenues, this current ratio rises to 1.39.
Total assets amounted to $52.027 billion, including $19.08 billion in goodwill and other intangibles. At 36.7% of total assets, that is more than I like, but I am old fashioned. This is not out of bounds nor unacceptable. Total liabilities less equity comes to $29.69 billion that includes $14.606 billion in long-term debt. This is more than I would like to see, but not crazy and not today's problem. This balance sheet is in far better shape than I expected given the way the stock is trading.
Danger Ahead?
Readers will see that PARA has been in steady state of erosion in share price since early 2021. The stock trades around the pandemic shutdown low of 2020, which was $9.80. Should the stock lose contact with that level, a sharp downside move could be possible. Let's zoom in:
The stock is closing a descending-triangle pattern before it looks like the pattern was ready to close. Relative strength is very weak. The daily MACD is just atrocious. Does it make sense? Cash flows are positive. The firm is expected to be profitable. The balance sheet is not awful. The charts are telling me not to buy PARA here. The short interest is telling me that I should buy it somewhere.
I am not crazy enough to purchase the equity here. I might just be crazy enough to sell some July 19, 2024 $9 puts for about $0.20 and live with the $8.80 net basis if I do get tagged. If not, I'll have a minor payday.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
