You might remember Warren Buffett's famous comment about Disney some twenty years ago, when he made the analogy that owning Disney shares was like owning a catalog of franchises that can be exploited over and over again, the equivalent of owning an oil field whose resources would return to the ground after extraction.

Similarly, Paramount has a catalog of intellectual properties that are absolutely extraordinary (Star Trek, SpongeBob SquarePants, The Godfather, South Park, Mission Impossible, Terminator, Sonic, Patrol, Scream or Kung Fu Panda). In recent months, the group has also demonstrated its ability to produce new blockbusters, such as the Yellowstone saga, Top Gun, Criminal Minds, etc.

The company delivers a sustainable return on tangible equity of over 20%, but is nevertheless valued at x0.5 of its revenues, compared to x4.5 for Netflix.

This is a paradoxical situation, since the production of original content remains the key to success. As a proof, Netflix is powerful on distribution (with the largest number of members on streaming), but it offers only 1500 original titles on a catalog of 17000 titles. The group is therefore in vital need of the studios, especially those of Paramount, the king of kings in this area with 10,000 films and 30,000 series. Of course, Netflix aims to grow and invests $17 billion per year in content. But Paramount has aligned itself with this standard, so we are witnessing a fight between equals here.

Traditional TV, while declining, is still a $140 billion industry, and the CBS network (owned by Paramount) is the U.S. industry leader. Paramount+ and Showtime combined, both owned by Paramount, are the fastest growing streaming service, with 56 million members and recent launches in 16 new countries.
 
The management, which managed to turn around Viacom (ex-Paramount) before the merger with CBS, has so far piloted a successful entry into streaming, and is showing that it has no qualms about shutting down its unviable businesses, as it did when it divested the publishing business. 
 
The advertising market has not yet penetrated streaming services well, but if it does, it will create a notable source of additional growth. The group will also be able to achieve substantial economies of scale as it integrates its various businesses through its proprietary streaming platforms.

Financial situation

Paramount has a low level of debt compared to its two main rivals Netflix and WarnerMedia (owned by AT&T), with maturities well spread over the next decades. It drives its accounting conservatively (all development and production costs are expensed rather than capitalized).

The company is still very profitable on a consolidated bottom line basis. Indeed, if the development of the streaming activity costs money, the other segments (cinema, TV, etc.) are superb cash machines. It also benefits from the lowest DTC (Direct To Consumer, i.e. streaming) acquisition cost, estimated at 5 dollars for streaming and 1.2 dollars for Pluto TV.

The current share valuation of $23 is equivalent to 8 times average annual FCF over the last decade, and 6 times average EPS over the last decade. The group provides a steady and growing dividend and a yield of 4%.

There are a few negative points, however. The group's advertising revenues are down, and the Linear TV division's audience is eroding. The streaming offer will therefore have to compensate for this loss of earnings.

The group's accounts are also difficult to read, due to the huge depreciation and amortization charges and changes in working capital that are typical in the media industry (Disney's accounts are similarly opaque). That said, we can see that over the last decade 2011-2021, Paramount has released a total of $41 in EPS (earnings per share), or an annual average of $3.8. On a FCF (free cash flow) basis, it produces a FCF per share of $31, or an annual average of $2.8.

Paramount is therefore a quality asset, with a valuable catalog of intellectual property, and a low valuation. An opportunity that has not escaped Berkshire Hathaway's attention.