Why Did Buffett Buy Paramount Global?

Why Did Buffett Buy Paramount Global? In the past few months, Warren Buffett’s Berkshire Hathaway has been buying shares at a fever pitch. The dip in stock prices that defined early 2022 has created a slew of new investment opportunities for value investors like Buffett. Even at over 91 years old, the perennial investor has jumped into the market, deploying much of Berkshire’s excess cash to buy stocks he believes to be oversold.

 

One of the stocks the Oracle of Omaha has bought heavily is entertainment giant Paramount Global (NASDAQ:PARA). The stock has sold off by nearly 14 percent this year, leaving it at an attractive price relative to its earnings and sales. In Q1, Berkshire Hathaway purchased 68.9 million shares of the film and television studio, a stake that was worth about $2.6 billion at the time. Here’s what you need to know about the decision to buy Paramount and whether it’s a good long-term investment for Berkshire.

The driving force behind the decision to buy Paramount Global was likely the fact that the company has exposure to both traditional distribution and streaming services. Streaming is clearly valuable, but recent upsets have proven that traditional television may not be dead yet. Through its CBS network and the Paramount+ streaming service, Paramount Global straddles both worlds.

 

Paramount also has a considerable moat as a result of its huge film catalog. The intellectual properties it has built up over the years can be monetized through ongoing distribution, as well as through sequels and remakes. Buffett has always favored companies with existing competitive advantages, and Paramount seems to fit the bill.

 

Although Paramount Global clearly represents a bet on the future of legacy television, its streaming service is also quite attractive. In Q1 alone, Paramount+ added 6.8 million subscribers, even as streaming giant Netflix was losing users. This brings the total number of subscribers to nearly 40 million.

 

Paramount Global also has the kind of sturdy fundamentals that Buffett has always liked. In Q1, revenue was $7.3 billion, down just 1 percent from the same quarter the previous year. The company’s direct-to-consumer segment, though, had a stellar year, growing by 82 percent year-over-year. Although its free cash flow has been trending downward from a peak in 2017, Paramount is still producing an ample supply of cash.

 

As one might expect given the market conditions of 2022, earnings were a weak spot for Paramount in Q1. Diluted EPS fell from $1.42 to just $0.58, a drop of 59 percent. Based on Buffett’s bullish attitude toward the stock, though, it appears that he believes this fall represents a short-term problem rather than a long-term downward adjustment of earnings. As the Paramount+ streaming service grows and film revenues rebound, earnings should begin to rise again.

 

The crowning consideration for a Berkshire stock, however, is always value. In this category, Paramount looks particularly attractive. The stock is trading at a forward P/E of 9.78, a price-to-book of 0.72 and a price-to-sales of 0.59. Thanks to the selloff this year, Paramount is likely a better buy than it has been in several years.

Taking all of these factors and putting them together, the picture of a classic Buffett stock emerges.

 

Paramount is a legacy company with a considerable moat that has sold off sharply this year. At the same time, it also has ample room for future growth through film, television and especially its streaming segment.

 

While earnings are down, revenue remains strong, and the company cash flows positively. On top of these factors, Paramount Global trades at favorable ratios to its earnings and sales. All told, Paramount looks like the kind of value stock that Buffett tends to favor in his portfolio.

 

The next question is whether the Paramount Global position will be profitable for Berkshire. Unsurprisingly, shares jumped by about 15 percent after Buffett’s new stake was announced, leading to a rapid surge in gains for Berkshire. The question of long-term profitability, however, is a bit more complicated.

 

On the 12-month time horizon, Paramount appears to have mixed prospects. The median analyst target price puts Para stock at $33.50, up 28.6 percent from the most recent price of $28.52. The lowest target, though, suggests that the stock could slide a further 11.7 percent to $23.

 

While these targets give some notion of where the stock could go in the short-term, it’s important to remember that Buffett prefers holding stock for years or decades at a time. As a result, Paramount’s performance over the coming year likely isn’t of much concern to him, provided the underlying nature of the entertainment business doesn’t change.

 

The real driver of the long-term share price will be future earnings. Based on Paramount+’s rapid growth, there’s a good chance that earnings will recover. If this occurs, investors can expect to see higher share prices. Higher spending on building streaming revenue could keep the stock low into the medium-term, but the long-term prospects for growth are quite good if Paramount continues its current trajectory.

 

In addition to the stock’s probable appreciation, Berkshire will almost certainly continue to see returns in the form of dividends. Paramount currently yields 3.73 percent for an annual payout of $0.96. The 5-year CAGR for dividend growth is 5.92 percent, a fairly robust rate that should provide Berkshire with strong future income.

 

Overall, the prospects look good for Berkshire’s stake in Paramount. If Paramount+ continues to grow rapidly and drives higher earnings, Buffett will likely have another market-beating winner in his portfolio. Even if the stock doesn’t appreciate quickly, its dividend is high enough to bolster returns. The odds are that Paramount Global will be a profitable stock for Berkshire Hathaway, and it could be one that the company continues to hold after Buffett has left the scene.

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