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

The streaming industry is facing significant challenges including a slowdown on the advertising market. Walt Disney (DIS), a media and entertainment company, recently received a downward revision from a Macquarie Analyst, which has added to the near-term uncertainty of the company. Should investors sell or buy the stock? Continue reading to learn more.

The Walt Disney Company is facing a number of challenges, which have caused investors to be concerned. In the face of economic challenges, the Walt Disney Company (DIS) reported declining profits and increasing costs for its second fiscal quarter. The stock is also trading below the 50-day and 20-day moving averages indicating that it's in a downward trend.

This article will explain in detail the reasons why it is best to avoid this stock.

Recent earnings have highlighted the challenges facing the sector. The slowdown in the advertising market continues to be a serious problem for streaming platforms. Direct-to-consumer profitability has also impacted investor confidence.

The streaming wars in the entertainment industry, which were initially centered around the pursuit for subscribers, are now a fierce battle to get ad dollars. This is driven by an increased focus on profitability. The future of streaming remains uncertain with impending price increases and industry restructuring.

Tim Nollen of Macquarie downgraded DIS from Outperforming (highly recommended) to Neutral. He cited concerns about declining linear networks, direct consumer hurdles and a lagging parks business.

DIS' EBITDA and EBIT have also declined by a CAGR between 31% and 4,9% in the last three years. Over the same period, its net income and earnings per share (EPS) have fallen at CAGRs between 8.5% and 5,3%.

In the face of such uncertainty, the shares of DIS fell 25% in the past nine-month period and 14.6% in the last year. They closed the last trading day at $88.14. The stock's beta over the past 24 months is 1.19.

Tensions rise as plans for campus collapse are re-evaluated

DIS has cancelled its plans to build a new campus for employees in Florida. The company cited changing business conditions as well as the return of CEO Bob Iger. The decision was made amid a heated dispute with Governor Ron DeSantis. DIS filed a lawsuit against him and the newly appointed board members of their special district, accusing them of political retribution.

Conflict arose from DIS's criticism of a controversial Florida law. The cancellation of Disney's Florida campus is fueling the dispute between Disney, the Florida government and other stakeholders.

DIS's costs and expenses for the first quarter of fiscal 2023 ended March 31, 2020 increased by 10.7% over the previous year to $19.54 Billion. Cash used for investing activities - continuing operations increased 25.5% compared to the previous quarter, reaching $2.54 billion.

The company's earnings per share (EPS) excluding certain items fell 13.9% from the previous year to $0.93.

DIS's domestic channel revenues for the third quarter fell 4% from the previous year quarter, to $5.60 Billion, while operating income dropped 33% to $1.60 Billion. The decline in operating income is due to lower results both in Cable and Broadcasting.

The operating income for international channels also fell by 65% to $85 millions. The decline in operating income is primarily due lower advertising revenues, which are partially offset by reduced programming costs.

The company's Media and Entertainment Distribution Segment's Linear Networks revenue for the quarter fell 7% over the previous year to $6.60 Billion, and the operating income dropped 35% to $1.80 Billion.

DIS announced that it will close its luxury Star Wars hotel in Orlando less than two year after its opening. DIS announced the decision as part of its cost-cutting initiatives across its parks and entertainment businesses. The immersive hotel experience is ending in September, as the media giant seeks a reduction of expenses and a streamlining of operations.

Shutting down a relatively recent and immersive attraction could raise concerns about profitability. It might also degrade DIS’s reputation and put DIS’s future prospects and financial health into question.

Poor Profitability

The trailing 12-month gross margin for DIS is 33.04%, which is 33.6% less than the average industry of 49.76%. The EBITDA margin for the trailing 12 months is 14.56%, which is 18.9% less than the 17.95% industry average. Its trailing-12 month levered FCF is 6.02%, which is 20.2% less than the industry average of 7.54%.

The ROTC for the 12-month trailing period of DIS is 2.95%, which is 22.8% less than the average industry ROTC of 3.83%.

Rivalry between Hulu and Netflix

The Wall Street Journal reports that the battle for Hulu ownership, a streaming media provider, has intensified between Comcast Corporation (CMCSA), DIS, and DIS. The media rivalry that began with the Fox purchase has shifted to the valuation of Hulu.

The report states that there is a large discrepancy between the value of Hulu. NBC Universal values it at around $70 billion while DIS places it much lower. This ongoing feud influences DIS's streaming strategy, but it also reflects a competitive industry landscape.

Stretched Valuation

DIS's forward P/E multiple of 22.20x is 60.7% greater than the average industry value of 13.81x. The company's price/sales multiple is 1.81, which is 63.2% more than the average industry value of 1.11. Moreover, the company's forward EV/EBITDA multiplication of 13.94 is 65% more than the industry standard of 8.45.

The stock's forward EV/Sales Multiple of 2.38 is also 34.9% more than the industry average, which is 1.76.

DIS is rated D, which translates to Sell according to our proprietary POWR ratings system. The POWR ratings are calculated by weighing 118 factors to the optimal degree.

We also rate each stock according to eight categories. DIS's current price is below its 50-day average of $97.10, and its 200-day average of $100.54. This indicates a downward trend. This is why Momentum gets an F.

The stock also has a D grade for Value which is consistent with the premium valuation multiples.

The stock is ranked 9th out of 14 stocks within the D-rated entertainment - media producers industry.

Here you can find additional DIS ratings on Growth, Stability and Quality.

DIS's decision to abandon plans for a Florida campus reflects not only changing business conditions, but is also a new point of contention in an ongoing feud between Governor DeSantis' and the leadership of the state.

The company is also facing a difficult situation with its decision to close the luxury Star Wars hotel in Orlando.

Analysts are also concerned that DIS will not be able to achieve streaming profitability in 2024 as the current goal.

The stock may be better avoided at this time, given the long list of macroeconomic uncertainty.

The odds that DIS will outperform in the coming weeks and months are greatly reduced. There are still many peers in the industry with high POWR ratings. Consider this B-rated stock (Buy), instead, from the Entertainment-Media Producers sector:

Tencent Music Entertainment Group (TME) ADR

You can also buy B-rated stocks in the entertainment-broadcasters sector:

Lizhi Inc. ADR (LIZI)

The bear market is not over...

This is why Steve Reitmeister, a 40-year veteran of the investment world, has created a timely presentation that includes a trading strategy and his top picks.

DIS shares traded at $88.86 on Friday morning. This was up $0.72 (+0.82%). DIS shares have gained 2.28% year-to-date compared to the S&P 500 benchmark index's 10.11% increase during the same time period.

About the Author: Kritika Saarmah

Kritika's passion for writing and interest in risky financial instruments made her an analyst and journalist. She has a bachelor's in commerce, and is currently studying for the CFA. She hopes to identify investment opportunities that are not being explored by investors using her fundamental approach.