Over the past six months, Paramount has been a great trade, beating the S&P 500 by 20.7%. Its stock price has climbed to $15.75, representing a healthy 33.7% increase. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Paramount, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Paramount Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Paramount. Here are three reasons why PSKY doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Paramount’s sales grew at a weak 2.8% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Paramount will flip from cash-producing to cash-burning. Their consensus estimates imply its free cash flow margin of 1.1% for the last 12 months will decrease to negative 1.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Paramount’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Paramount doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 19.2× forward P/E (or $15.75 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Like More Than Paramount
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