Paramount shares jump after third-quarter earnings report, comments from David Ellison
Shares of Paramount jumped more than 10% Tuesday following the release of the company’s third-quarter earnings report and a strategy update from CEO David Ellison and his management team.
The stock rose above $16.90, its highest level in two weeks, at mid-session. Trading volume during Veterans Day was below average. Shares are up nearly 50% since the Aug. 7 closing of the Paramount-Skydance merger, but have been flat in recent weeks.
Paramount’s quarterly revenue was a bit lighter than Wall Street analysts expected, and the report contained other less-than-stellar data. Even so, with the timing of the Paramount-Skydance merger meaning that current management did not have control over the entire quarter, financial data was less of a focus than executive commentary on strategy.
Ellison said a few things intended to woo investors during the company’s earnings conference call Monday. He acknowledged the company’s merger and acquisition options, but declined to address them specifically. “We really look at it as ‘buy versus build’ and we absolutely have the capacity to build,” he said.
With the ink barely dry on the Skydance and Paramount merger, Ellison & Co. has made three offers to acquire all of Warner Bros. Discovery. For its part, WBD says it is also attracting interest in its studio and streaming division and still plans to pursue plans to formally split into two companies.
Paramount also increased its cost savings target from the Skydance deal from $2 billion to $3 billion and said it was significantly increasing its film and television production. The company has also made dramatic moves in the streaming space, adding UFC fights at no extra cost to subscribers, citing the added value to justify a planned price hike in January.
Wall Street analysts reacted with generally guarded reactions to the earnings report, with many pointing to the long time horizon of mergers and acquisitions. A strategic chess game is being played between Ellison, WBD CEO David Zaslav, and interested parties like Comcast and Netflix. Even once clarity emerges in the coming weeks and months, a proposed combination would result in even more uncertainty and transition.
BofA Securities analyst Jessica Reif Ehrlich summed it up in the title of her note to clients: “Dizzying ambitions, but the patience required is paramount.” She rates the stock as “underperform” (sell), but increased her 12-month price target from $11 to $13. “There are still many unknowns about the strategic initiatives undertaken by the company and, as evidenced by previous significant consolidations, restructurings often take years to implement,” she wrote.
TD Cowen’s Doug Creutz, who has a “hold” rating on the stock, said the management team has done a “credible job” of laying out its vision. “Unsurprisingly,” he added, “the plan is another twist on the old strategy of ‘cut a lot of spending and create better content.’ Execution will be crucial.
The newly merged company is “off to a promising start,” said Moffett Nathanson’s Robert Fishman, but his memo flagged Paramount’s plans to increase content spending by $1.5 billion a year and strengthen Paramount+. “The question hanging over this approach,” he wrote, “is the level of investment required for the company’s DTC offering to truly compete with the likes of Netflix, Disney and Amazon – all of which hold a considerable lead in global scale, content production and engagement. To accelerate its path to DTC scale, we continue to believe that mergers and acquisitions are the most likely route Paramount Skydance will explore.”
Fishman has a “neutral” rating on Paramount shares.
Guggenheim’s Michael Morris, also neutral on the stock, said Paramount’s increased cost-savings estimates, at the same time as it lowers its profit forecast, gives it “deja vu when it comes to media mergers.” If and until a WBD deal materializes, he wrote, Paramount is “running a very similar playbook to Warner Bros.” after the Discovery combination in 2022, where optimism and increased synergies result in lower financial estimates.”
