Paramount’s spike in earnings growth is likely a thing of the past, says Wells Fargo in downgrade
Wells Fargo is changing its view on Paramount, saying the entertainment company may have passed its peak in earnings growth. “The transition to streaming appears to be the right one, but earnings may need another downward structural reset, even after streaming declines,” analyst Steven Cahall wrote in a note to clients Tuesday. “We don’t believe these upcoming negatives will factor into equities and downgrade PARA on an equal weight basis. Underwriting a multi-year transition will be increasingly difficult given the ongoing challenges to restart earnings growth.” Cahall cut its share price target to $19 per share, citing lower multi-year earnings. In the direct-to-consumer, he said the fundamentals looked strongest for Disney while Fox offered a strong balance sheet and monetization opportunities in sports. “PARA’s earnings may have peaked around 2018 given that we expect its streaming revenue and margins will not replicate its linear business,” Cahall said. “We believe this is true for the majority of media peers that perform similar DTC pivots, with PARA being the most over-indexed for pay-TV revenue.” Despite those concerns, Cahall said a strong content slate and M&A potential keep Wells Fargo from going negative on the title. Along with the downgrade, Cahall cut stock price targets for Comcast, Warner Bros. Discovery, Lions Gate Entertainment and AMC Networks. Paramount shares are down 35% this year, with the bank’s new price target suggesting a modest decline of 3% from Monday’s close. – CNBC’s Michael Bloom contributed reporting. Disclosure: Comcast is the parent company of NBCUniversal, which includes CNBC.