Shares of ViacomCBS (PARA -3.94%)-- Oops! That was its name yesterday. Today, it's "Paramount Global" or simply "Paramount" to its friends. The company collapsed on Wednesday, falling more than 22% at one point and staying pretty much stuck down there all the way up until now, 1 p.m. ET.
And Paramount's new name isn't the only thing that may have investors confused today. Last night, Paramount announced its financial results for the fiscal fourth quarter of 2021 and for 2021 as a whole. Whether the news was good or bad depends a lot on how you look at the numbers.
Image source: Getty Images.
On the one hand, Paramount seems to have missed Wall Street's projection for its "pro forma" earnings, reporting just $0.26 per share where Wall Street wanted to see $0.43. On the other hand, Paramount delivered tremendous generally accepted accounting principles (GAAP) earnings, with profits as calculated according to GAAP more than doubling to $3.05 per share in Q4 and full-year profits up 79% at $6.69 per share.
Viewed from this perspective, both Paramount's fiscal Q4 and its fiscal 2021 look pretty good. Problem is, the deeper you dig into the company's earnings release, the more worrisome this picture gets. Most troublesome to me is the fact that while GAAP profits went up significantly, Paramount's free cash flow fell off a cliff in 2021, declining by more than two-thirds to $599 million.
And so here's investors' dilemma in a nutshell: At $28.56 per share, Paramount stock may cost only 4.3 times GAAP trailing earnings right now, and this may seem incredibly cheap.
Unfortunately, when valued on free cash flow, Paramount stock that has a market capitalization of $18.6 billion costs a much more expensive 31 times free cash flow. And if you factor in the company's $14.4 billion in net debt, the stock is arguably even more expensive than that, with an enterprise value-to-free cash flow ratio of 55!
While I certainly understand that some value investors may be tempted by the low price-to-earnings (P/E) ratio, as for me, Paramount is not a hill I'm prepared to die on.
