Paramount Global shares fell nearly 9% midway through the trading day after veteran media analyst Jessica Reif Ehrlich delivered a harsh verdict on the stock.The BofA Securities analyst downgraded the stock to “underperform,” or sell, in a blistering note to clients whose headline declared that shares are “hard to buy if it’s not for sale.” Her move is known in financial market circles as a “double downgrade,” meaning Reif Ehrlich all at once took her rating down two notches, from “buy” to “underperform,” bypassing “market perform” (neutral).Elaborating on the headline of her note, Ehrlich explained that her previous optimism about the stock was “predicated on Paramount’s inherent asset value in a potential sale. Despite receiving credible bids for several different assets (e.g., Showtime and BET), it does not appear any significant asset sales are on the horizon.”The news followed Paramount’s upbeat earnings report last week, which boosted its shares thanks to the company’s revelation that peak streaming losses had occurred in 2022. The stock was at $12.57, up from its 52-week low of $10.51, which was established last month. Losses in the streaming division narrowed during the third quarter and the company added 2.7 million Paramount+ subscribers, though the company remains challenged by shifts in advertising and linear TV viewing.In its presentation to investors, the company highlighted one M&A deal that closed after the Sept. 30 end to last quarter: the sale of book publisher Simon & Schuster to investment firm KKR for $1.62 billion. It has also held talks in recent months about potential sales of stakes in BET and preschool brand Noggin, but neither set of talks yielded a deal. It also fielded a bid for Showtime but deemed it insufficient.Ehrlich’s revised 12-month price target for Paramount shares is $9. Although that is substantially lower than her prior outlook of $32, Ehrlich noted that it represents “a modest premium” to the current share prices of media peers Warner Bros. Discovery shares, though it is below Disney’s level.“Given the secular challenges in the traditional media ecosystem, we were surprised to see Paramount walk away from these potential buyers for various assets,” Ehrlich wrote. “While we recognize management should try to extract maximum value, shares of Paramount are down over 40% since May 1. Our concern is the longer it takes to execute potential asset sales, the less value they could ultimately garner. This, coupled with the challenging macro backdrop, persistent secular headwinds, negative free cash flow continuing into 2024 and Paramount’s elevated leverage levels (nearly 5x our 2024 estimate) create an unfavorable medium-term outlook.”Selling assets, she added, are “the most clear-cut way for management to drive shareholder value.”Left unaddressed in her note was the larger M&A question that has dogged the company for years, which is whether it can continue making a go of it as it is structured or whether a merger is inevitable. The complicating factor in the case of Paramount is its ownership structure. Non-executive Chairwoman Shari Redstone runs National Amusements, which controls Paramount’s shares.
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