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Buy, Sell or Hold: Walt Disney Co.(DIS)

The streaming industry faces significant challenges, including a slowdown in advertising market. In this uncertain landscape, media and entertainment company Walt Disney (DIS) recently received a downgrade from a Macquarie analyst, adding to the company's near-term uncertainties. SO, should investors buy, sell, or hold the stock? Keep reading to find out...

Entertainment giant The Walt Disney Company (DIS) is currently facing a myriad of challenges that have raised concerns among investors. Amidst the economic headwinds, the company reported declining profits and rising costs in its fiscal second quarter. Moreover, the stock is trading below its 50-day and 200-day moving averages, indicating a downtrend.

In this article, I’ll discuss in detail why this stock might be best avoided.

The recent earnings season has highlighted the challenges that lie ahead for the sector. The advertising market slowdown continues to pose a serious problem for streaming platforms, while direct-to-consumer profitability and subscriber slowdowns have impacted investor sentiment.

In addition, the entertainment industry's streaming wars, which initially revolved around the pursuit of subscribers, have now transformed into a fierce competition for ad dollars, driven by a heightened focus on profitability. With impending price hikes and industry restructuring, the future of the streaming industry remains uncertain.

DIS recently received a downgrade from Outperforming to Neutral from Tim Nollen, a Macquarie analyst, who cited concerns over declining linear networks, direct-to-consumer hurdles, and a slowing parks business.

Furthermore, DIS’ EBIT and EBITDA have declined at a CAGR of 31% and 4.9% over the past three years. Its net income and EPS have tumbled at CAGRs of 8.5% and 5.3% over the same time period.

Amidst such uncertainty, shares of DIS have plunged 25% over the past nine months and 14.6% over the past year to close the last trading session at $88.14. The stock has a 24-month beta of 1.19.

Here is what could shape DIS’ performance in the near term:

Feud with Florida: Tensions Rise as Plans for Campus Collapse

DIS has decided to cancel its plans for a new employee campus in Florida, citing changing business conditions and the return of CEO Bob Iger. The decision comes amidst a heated feud with Governor Ron DeSantis, with DIS filing a lawsuit accusing him and the new board members of its special district of political retribution.

The conflict stems from DIS’ criticism of a controversial Florida bill. The cancellation of the Florida campus adds fuel to the ongoing dispute between Disney and the Florida government.

Disappointing Financials

During the fiscal 2023 first quarter ended March 31, 2023, DIS’ costs and expenses increased 10.7% year-over-year to $19.54 billion. Its cash used in investing activities- continuing operations rose 25.5% from the year-ago quarter to $2.54 billion.

The company’s after-tax income excluding certain items, fell 9% year-over-year to $1.92 billion, while EPS, excluding certain items, came in at $0.93, down 13.9% year-over-year.

Moreover, DIS’ domestic channels revenues for the quarter decreased 4% from the prior-year quarter to $5.60 billion, and operating income declined 33% year-over-year to $1.60 billion. The decrease in operating income was due to lower results in both Cable and Broadcasting.

Moreover, international channels revenues also decreased 18% year-over-year to $1.10 billion and operating income fell 65% year-over-year to $85 million. The decrease in operating income was primarily due to lower advertising revenue, partially offset by a reduction of programming costs.

As a result, the company’s Media and Entertainment Distribution segment’s Linear Networks revenues for the quarter decreased 7% year-over-year to $6.60 billion, and operating income decreased 35% year-over-year to $1.80 billion.

Financial Health in Question

DIS recently announced the closure of its Star Wars-themed luxury hotel in Orlando, less than two years after its opening. The decision is part of DIS’ cost-cutting measures across its entertainment and parks businesses. The immersive hotel experience will end in September as the media giant seeks to streamline operations and reduce expenses.

Shutting down a relatively new and immersive attraction raises concerns about profitability, might degrade DIS’s reputation, and question the company's financial health and future prospects.

Poor Profitability

DIS’s trailing 12-month gross profit margin of 33.04% is 33.6% lower than the industry average of 49.76%. Its trailing 12-month EBITDA margin of 14.56% is 18.9% lower than the industry average of 17.95%. Also, its trailing-12-month levered FCF margin of 6.02% is 20.2% lower than the 7.54% industry average.

In addition, DIS’ trailing 12-month ROTC of 2.95% is 22.8% lower than the industry average of 3.83%.

Rivalry for Hulu

According to the Wall Street Journal, the battle between DIS and Comcast Corporation (CMCSA) for ownership of Hulu, a provider of on-demand streaming media, is heating up. The rivalry between these media giants, which began with the Fox acquisition, has now shifted focus to the valuation of Hulu.

According to the report, there is a significant discrepancy in the valuation of Hulu, with NBC Universal estimating it to be worth around $70 billion, while DIS values it at a much lower figure. The ongoing feud not only influences DIS’ streaming strategy but also reflects the competitive landscape in the industry.

Stretched Valuation

In terms of forward non-GAAP P/E, DIS is currently trading at 22.20x, which is 60.7% higher than the industry average of 13.81x. Its forward Price/Sales multiple of 1.81 is 63.2% higher than the industry average of 1.11. Moreover, its forward EV/EBITDA multiple of 13.94 is 65% higher than the industry average of 8.45.

Also, the stock’s forward EV/Sales multiple of 2.38 is 34.9% higher than the industry average of 1.76.

POWR Ratings Reflect Weakness

DIS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DIS is currently trading below its 50-day and 200-day moving averages of $97.10 and $100.54, respectively, indicating a downtrend. This justifies its F grade in Momentum.

Moreover, the stock has a grade D for Value, consistent with its premium valuation multiples.

The stock is ranked #9 of 14 stocks in the D-rated Entertainment – Media Producers industry.

One can access additional DIS ratings for Growth, Stability, Quality, and Sentiment here.

Bottom Line

DIS’ decision to abandon its Florida campus plans not only reflects changing business conditions but also serves as another point of contention in the ongoing feud with Governor DeSantis and the state's leadership.

In addition, its decision to shut down the Star Wars-themed luxury hotel in Orlando reflects a challenging situation for the company.

Moreover, given declining linear networks, direct-to-consumer hurdles, and a slowing parks business, analysts are concerned about DIS’ ability to reach streaming profitability by 2024, which is the company's current target.

Given the entertainment company’s long list of macroeconomic uncertainties, the stock might be best avoided now.

Stocks to Consider Instead of The Walt Disney Company (DIS)

The odds of DIS outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider this B-rated (Buy) stock from the Entertainment-Media Producers industry instead:

Tencent Music Entertainment Group ADR (TME)

Fuji Media Holdings, Inc. (FJTNY)

One can also check out the following B-rated (Buy) stock in the Entertainment- Broadcasters industry:

Lizhi Inc. ADR (LIZI)

The Bear Market is NOT Over…

That is why you need to discover this timely presentation with a trading plan and top picks from 40-year investment veteran Steve Reitmeister:

REVISED: 2023 Stock Market Outlook > 

DIS shares were trading at $88.86 per share on Friday morning, up $0.72 (+0.82%). Year-to-date, DIS has gained 2.28%, versus a 10.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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