Yahoo News Paramount Stock Falls Sharply as Analysts Discuss Dividend Cut, “Concerning” Free Cash Flow
“Concerning.” “Downside risk.” Wall Street analysts chose unusually worried verbiage in dissecting Paramount Global’s weaker-than-expected first-quarter results and news of a dividend cut on Thursday. “Ouch!” may have been the thought of some company insiders and investors. After all, the hit to the stock was also pronounced. It was down 25.2 percent at $17.12 as of 10:30 a.m. EST after earlier going as low as $17.03, close to its 52-week low of $15.29.
“Paramount missed their first-quarter adjusted (operating income before depreciation and amortization (OIBDA) guidance by about 11 percent and cut their dividend, which we take as signs that there is continued estimate risk,” Wells Fargo analyst Steven Cahall, who has an “underweight” rating on the stock with an $11 price target, wrote in a report. While the entertainment conglomerate’s streaming business recorded a wider loss of $511 million in the first quarter, experts called the result roughly in line with estimates.
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But Cahall highlighted that Paramount’s free cash flow loss in particular widened. Free cash flow is a profitability metric that Wall Street uses to gauge how much money companies have left over once they meet all their financial commitments. A loss means that a firm must tap into its cash reserves or use debt. Paramount’s first-quarter free cash flow loss came in at $554 million, “versus our $234 million loss and (the) Street $411 million loss” estimate, the analyst said.
Management reacted by slashing the firm’s quarterly dividend from 24 cents per share to 5 cents a share. Analysts calculated that this would save Paramount around $500 million annually.
But what will all that mean for management’s goal of returning to positive free cash flow in 2024? “The dividend and bigger first-quarter cash outflow is likely to rekindle discussions around cash generation, and what the key drivers are for getting to free cash flow positive,” Cahall wrote in a section under the header “The first cut is the deepest.”
He also emphasized: “We think a dividend cut typically signals material shifts in managements’ views of risk profiles.” Before management on an earnings conference call said it would continue to follow key streaming strategies pursued so far, Cahall suggested that “at issue for Paramount will be whether it is reassessing the path for direct-to-consumer.” His overall takeaway: “Our bias is that first-quarter results and (the) dividend cut likely suggests forward (earnings) estimates have downside risk.”
Meanwhile, Wolfe Research analyst Peter Supino, who has an “underperform” rating on Paramount shares with a stock price target of $12, called the company’s latest free cash flow update “concerning.”
Quarterly revenue missed Wall Street estimates “primarily driven by TV media (unit) softness followed by film, driving lower first-quarter OIBDA,” he explained. “The weak results translated to much lower than expected free cash flow,” which he had projected to hit a loss of $86 million, while the broader Wall Street expectation was for a loss of $203 million. That in turn “saw the quarterly cash dividend cut.”
Supino also looked at where Paramount’s streaming business stands. Streaming revenue for the first quarter hit $1.51 billion, exceeding the analyst’s $1.45 billion estimate and the Street expectation for $1.45 billion “on higher-than-expected subscription revenue,” he noted. “This led to slightly better OIBDA of a $511 million loss,” compared with his forecast for a $544 million loss and Wall Street’s $541 million loss estimate. Paramount+ subscribers reaching the 60 million mark also beat expectations. “However, Pluto monthly active users lagged expectations at 1.5 million net adds for 80.0 million MAUs,” compared with his 82.0 million and the Street’s 81.8 million target, Supino wrote.
CFRA Research analyst Kenneth Leon reiterated his “sell” rating on Paramount shares on Thursday, while cutting his stock price target by $4 to $16, noting “that is still a 30 percent premium to peers,such as Fox and Warner Bros. Discovery.” He also reduced his earnings per share forecasts for 2023 by 15 cents to 70 cents a share and for 2024 by 15 cents to $1.50 per share.
Addressing the 79 percent dividend cut, he argued: “We think Paramount is a step behind in deleveraging $15.9 billion in total debt and looks for more flexibility with $500 million in savings from lower dividends paid.”
TD Cowen‘s Doug Creutz, who has a “market perform” rating and $25 stock price target on Paramount, highlighted that the quarterly results “missed on (the) top line and bottom line versus our expectations and consensus estimates,” explaining: “The revenue miss was due to a challenging global ad market, while (earnings) downside was driven by the studio segment. He summarized his takeaway in his report’s headline: “No big surprises in quarter, but dividend cut hurts.”
In contrast to several analysts’ laments, Wall Street veteran Mario Gabelli, whose GAMCO Investors owns a stake in Paramount, in a Thursday tweet called the dividend cut a “sound tactic.”
Beyond Wall Street, Third Bridge analyst Jamie Lumley also commented on the latest earnings from a big Hollywood player. “Paramount’s results came in with a mix of the good, the bad and the ugly,” he wrote. “While Paramount+ adding 4.1 million subscribers is more than twice as many as Netflix managed in the quarter, it is a steep drop compared with the almost 10 million it brought in at the end of 2022. This raises concerns about the platform’s ability to maintain momentum as the company will be hard-pressed to find smash hits like Top Gun: Maverick to drive subscriber growth every quarter.”
User growth at Pluto TV “has also slowed, while streaming losses rose 31 percent,” Lumely noted. “Our experts have repeatedly highlighted the renewed focus on streaming profitability across the industry, and these results show there is a lot of work left to do at Paramount to scale this business.” His takeaway: “With the ongoing decline in the legacy TV Media business and weak theatrical numbers, Paramount will likely be weighing its options for how to reignite growth and bounce back from a sharp reversal in quarterly earnings.”
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