Media and entertainment company The Walt Disney Company (DIS) struggled with changing CEOs, the high cost of streaming, and other macroeconomic headwinds in 2022. DIS’ stock lost approximately 44% last year, marking its biggest annual decline since 1974. The stock is expected to plunge further this year due to continued macroeconomic turbulence.
Given its bleak prospects, investors could avoid this risky entertainment stock in 2023. Various reasons why I am bearish on DIS are discussed in this piece.
On November 21, 2022, DIS announced that Bob Iger, one of the most successful CEOs in the company’s history, returned to run the media empire once again, replacing his hand-picked successor, Bob Chapek. Chapek guided DIS through the pandemic, one of the most troubled periods in the company’s 99-year history, but ultimately the Board decided that its future was in better hands with Iger.
Iger agreed to serve as CEO for two years, with “a mandate from the Board to set the strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the Company at the completion of his term.”
On February 8, 2022, DIS announced its plans to reorganize its three divisions: Entertainment, ESPN, and parts and experiences. DIS also said it would cut 7,000 jobs from its workforce and slash $5.5 billion in costs, including $3 billion in content savings. This major corporate reorganization has been underway since Iger returned to the helm of Disney.
For the fourth quarter of fiscal 2023, DIS’ total segment revenues increased 7.8% year-over-year to $23.51 billion. However, the company’s total segment operating income declined 6.6% year-over-year to $3.04 billion. Direct-to-Consumer operating loss from the Disney Media and Entertainment Distribution segment widened 77.6% from the year-ago value to $1.05 billion.
The increase in operating loss was due to a higher loss at Disney+ and a decrease in results at Hulu. Disappointing results at Disney+ reflected higher programming and production costs and increased technology costs, while results at Hulu were primarily due to increased programming and production costs and decreased advertising revenue.
As of December 31, 2022, paid subscribers of Disney+ were 161.8 million, compared to 164.2 million as of October 1, 2022. A recent price hike for Disney’s streaming services likely led to a loss in Disney+ subscribers.
Shares of DIS have plunged 12.4% over the past six months and 32.4% over the past year to close the last trading session at $98.54. The stock is currently trading 33.7% below its 52-week high of $148.65, which it hit on March 3, 2022.
Here is what could shape DIS’ performance in the near term:
Disappointing Financials
For the fiscal 2023 first quarter ended December 31, 2022, DIS’ revenues grew 7.8% year-over-year to $23.51 billion. However, its costs and expenses increased 9.7% year-over-year to $21.52 billion. The company’s total segment operating income decreased 6.6% year-over-year to $3.04 billion. Also, its EPS, excluding certain items, came in at $0.99, down 6.6% year-over-year.
Furthermore, cash outflows for continuing operations increased 366% year-over-year to $974 million, while DIS’ free cash outflow was $2.16, up 81% year-over-year.
Poor Profitability
DIS’s trailing 12-month gross profit margin of 33.40% is 32.7% lower than the industry average of 49.65%. Likewise, the stock’s trailing 12-month EBITDA margin of 14.10% is 27.6% lower than the industry average of 19.46%. Also, its trailing-12-month levered FCF margin of 5.75% is 35.1% lower than the 8.88% industry average.
In addition, DIS’ trailing 12-month ROCE, ROTC, and ROTA of 3.57%, 2.66%, and 1.64% compare to the industry averages of 3.73%, 3.93%, and 1.77%, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, DIS is currently trading at 23.62x, 52.4% higher than the industry average of 15.50x. The stock’s forward EV/Sales multiple of 2.58 is 32.3% higher than the industry average of 1.95. Moreover, its forward EV/EBITDA multiple of 14.76 is 74.4% higher than the industry average of 8.46.
Also, the stock’s forward EV/EBIT of 17.62x is 11.2% higher than the industry average of 15.85x. Its forward Price/Sales multiple of 1.99 compares with the industry average of 1.26.
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 has a grade D for Value and Quality, consistent with its higher valuation and lower profitability than its peers.
In addition, DIS has a D grade for Momentum. The stock is currently trading below its 50-day and 200-day moving averages of $100.07 and $101.83, respectively, indicating a downtrend.
The stock is ranked #10 of 16 stocks in the F-rated Entertainment – Media Producers industry.
Beyond what has been discussed above, additional ratings for Growth, Stability, and Sentiment of DIS can be found here.
Bottom Line
Media and entertainment giant DIS notched its 52-week low of $84.07 on December 28, 2022. The company continues to struggle with higher expenses for streaming amid rising interest rates and decreasing discretionary spending with a looming economic slowdown. A recent price hike for Disney’s streaming services led to the loss of about 2.4 million Disney+ subscribers during the quarter.
Also, the company’s linear TV and direct-to-consumer units struggled during the fourth quarter. Furthermore, analysts expect DIS’ EPS for the current quarter (ending March 2023) to decline 8.1% year-over-year to $0.99.
With CEO Bob Iger's return to the helm, DIS is planning to make a “significant transformation” of its business by reducing expenses and reshaping the company around creativity. Despite the restructuring plans, the company’s near-term prospects look bleak.
Given DIS’ dismal financial performance, premium valuation, low profitability, and bleak growth prospects, it could be wise to avoid this stock in 2023.
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:
AMC Networks (AMCX)
You may also consider the following A-rated (Strong Buy) entertainment stocks:
Accel Entertainment, Inc. (ACEL)
Inspired Entertainment, Inc. (INSE)
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DIS shares were trading at $97.50 per share on Thursday morning, down $1.04 (-1.06%). Year-to-date, DIS has gained 12.22%, versus a 2.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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