Anytime a stock drops 28% in a single day, the news can't be good. In Paramount Global’s (PARA) case, Thursday’s earnings report was a disaster.
Volume was so high -- 72.1 million shares were traded yesterday, 6x its 30-day average -- Warren Buffett himself was probably trying to unload as much of Berkshire Hathaway’s (BRK.B) 93.6 million shares as it possibly could.
One positive from a busy day of trading is that Paramount’s options were unusually active on Thursday with no less than 11 with volumes at least 1.25x the open interest.
Call me crazy, but yesterday’s implosion makes its unusual options activity a very intriguing bet. After all, isn’t Buffett himself who says to be “greedy when others are fearful?”
Here’s my take on both the company, its stock, and of course, its options.
What’s All the Fuss?
Before getting into the nuts and bolts of Paramount's Q1 2023 results, it's important to remind readers that the entertainment company wasn't a perfect specimen heading into earnings. There were plenty of question marks, so the fact that it delivered a dud of a quarter really shouldn't be surprising to investors.
There is no question the company is trying to find traction for Paramount+. Until it does, there will be pain, but with pain, potential growth often comes. So here endeth my self-help speech.
Seriously, though, the dividend cut was probably the biggest annoyance from yesterday’s announcement. As of the April payment, its annual payout was $0.96 a share. The new yearly payout of $0.20 is an 80% reduction, lowering its dividend yield to 1.2% from 4.2% as of May 3. It was the first cut since 2009.
Ouch.
Not only did Berkshire’s holdings lose $604 million of market cap yesterday. But the holding company’s annual dividend haul is $71 million less due to the dividend cut.
I’m not saying Berkshire buys stocks solely based on the dividend because it doesn’t, but plenty of alternatives are available. If Buffett bolts, that’s a big kick in the groin for CEO Bob Bakish and majority shareholder Shari Redstone (through National Amusements).
As an aside, this is precisely why I've always preferred companies allocate excess cash in the form of special dividends or when done appropriately, share repurchases.
As for the rest of the report, there weren’t many surprises.
Its direct-to-consumer (DTC) business -- Paramount+ and Pluto TV -- delivered a 39% increase in revenue to $1.5 billion, with a $511 million loss, 12% higher than a year ago. I'm sorry; investors are upset that it grew revenues 3x faster than its losses. Ask Disney (DIS) about their losses from Disney+, etc.
At the end of the day, the company’s core movie and television assets and a streaming business expected to become profitable by the end of 2024 are likely worth considerably more than its current $10.7 billion market cap.
I have no idea what Buffett will do here. However, Berkshire will make money on its bet over the long haul, but only if it stays in the game. We will see soon enough.
The Unusually Active Options Play Here
Full disclosure: I subscribe to Paramount+ and will up my subscription to a merged Paramount+ Showtime when available. After watching The Offer, the fictionalized story of the making of the Godfather, I was sold on its content. But I digress.
Paramount is a name that’s been a part of American life since 1912. It's as American as apple pie. It’s had several owners over the years and will probably have several more over the next 111 years. It isn’t going anywhere.
Whether it gets taken private, is acquired by Berkshire (wishful thinking), or muddles along as a public company, it will always possess intrinsic value beyond its current market cap, which is why I’m talking about its options.
The company’s stock, since the financial crisis in 2008 and 2009, has traded below $10 on only one occasion -- from October 2008 to July 2009 -- so the odds of the recent bloodbath extending beyond this week’s major correction to the point where it falls into single digits seems remote.
Assuming that's the case, the Dec. 19, 2025 $12.50 puts (selling) appear to be a very intriguing bet for several reasons.
First, the premium income as I write this is $2.24, a 13.9% yield based on a $16.16 share price. With 959 days to expiration, the annualized yield is 5.3%. The current yield on a 3-year U.S. Treasury bill is 3.47%. So you’re getting paid 53% more than the Treasury to take on the additional risk.
Let’s assume PARA falls to $12 by the time the option expires at Christmas 2025. You’re still up 17% based on a net purchase price of $10.26.
However, should Paramount’s guidance for DTC profitability be on the money, there’s almost no chance that the share price will be anywhere near $12.50 come 2025. As a result, you’ll likely have pocketed the $224 in premium income and moved on to another play.
A second put that looks interesting is the Dec. 15 $15 contract. It has a bid price of $1.95, putting the net price at $13.05. Expiring in 224 days, the annualized yield is a little more than 19%. The odds of Paramount falling to $15 by Christmas 2023 are a lot higher than Christmas 2025, so you’re more likely to have it put to you in this instance.
You have to ask yourself: Do I think $13 is as far as it will fall over the next seven months, keeping in mind that it’s already lost 32% over the past week and 46% over the past year?
I say yes; $ 13 is the bottom. What would you say?
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
