Morningstar - Q1 2023 - 55

Hit Generator
Paramount Global boasts quality content and a broad reach.
BEST IDEAS: EQUITY
Neil Macker
This article is adapted from a Morningstar equity research report dated
Nov. 3, 2022.
Formed via the reunion of Viacom and CBS, the rebranded Paramount
Global PARA derives a durable competitive advantage from the CBS broadcast
network, a valuable portfolio of cable networks with worldwide carriage,
production studios, and a now deeper content library. Given our
overarching premise that the value of high-quality content will continue to
increase, the production studios are among the most attractive assets
of the reunited firm.
We assign Paramount a narrow moat rating. Our guiding premise in
media is that the value of video content continues to increase even as the
distribution markets mutate. Despite changes in distribution, pay-TV
penetration remains at above 60% of U.S. households. Even without a pay-TV
subscription, most cord-cutters still consume video content and many
use antennas to capture signals, providing content creators with an additional
avenue to generate revenue from these viewers. Given the ongoing
demand for content, we believe content creation is not a zero-sum game,
as high-quality content will always find an outlet.
The CBS studio has a history of generating hit programs, such as NCIS, and
then creating spinoff series, such as NCIS: New Orleans and NCIS: Los Angeles.
These series generate multiple cash flows across different windows, such as
broadcast first run, syndication, and streaming on both subscription and
ad-supported services. We expect the company to increase the percentage of
content on the broadcast network created in-house (currently above 70%)
to fully capture the multiple cash flows that a hit show can produce.
We believe the CBS broadcast network also provides Paramount with an
advantage, as the networks are the only outlets to reach almost all
households in the United States. The ongoing fragmentation of media impedes
advertisers' ability to reach a mass audience. Even with viewers' shift toward
cable over the years, network ratings still outpace cable ratings and
provide advertisers with one of the only remaining methods for reaching a
large number of consumers. We believe the combination of highly rated
original programming and exclusive sports rights will allow CBS to continue to
increase its revenue from retransmission fees and reverse compensation
while still receiving higher ad rates than a typical cable network.
Paramount Global PARA
Stats 12/31/2022
Morningstar Rating
QQQQQ
Price
$16.88
Economic Moat
Narrow
Price/Fair Value 12/31/2022
$80K
60
40
20
01/2020
01/2021
01/2022
Fair Value
Estimate
Per Share
45.00
Month-End
Closing Price
16.88
Sector
i Comm Svcs
Fair Value Estimate
$45.00
Capital Allocation
Standard
Industry
Entertainment
Uncertainty
High
Market Cap
$11.07 Billion
We think that top-line growth will be driven by streaming revenue from
both Paramount+ and Pluto TV. The two services build on the firm's
strong content creation abilities, deep programming library, and the secular
trend toward greater streaming adoption. As a result, Paramount+ can
still carve out a position in this intensely competitive market despite the large
head start of the incumbents.
Our updated $45 fair value estimate for Paramount implies a price/earnings
ratio of 24 times our 2022 earnings per share estimate and a 12 times
enterprise value/adjusted EBITDA multiple. We forecast average annual
top-line growth of 4% through 2026, reflecting growth at the new
Paramount+ service, which we expect will drive 21% average annual growth
for the new direct-to-consumer segment, partially offset by 7% growth
at the studio and flat revenue at the traditional TV media segment. K
Neil Macker is a senior equity analyst at Morningstar Research Services LLC.
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