- The latest earnings results reported in August provided a glimmer of hope for Disney investors, after recent years of losses and anemic growth driven by the pandemic.
- Even though Disney shares rebounded in August, the company has a long journey ahead to prove that its business can grow sustainably and for the stock to return to the $200 per share levels reached at the start of last year.
- Growth: Analysts estimate that Disney sales will grow 12% vs. 10% for the entertainment industry. Better yet, there is an expectation that Disney’s earnings per share (EPS) will rise 45% over a low base compared to 18% for the industry. Initiatives such as the Disney+ ad-supported tier, price increases, and content rationalization support a promising long-term outlook.
- Financial Strength: Disney seems to be in a strong financial position. The company has remained firmly on its feet even through the thick of the pandemic, generating operating cash flow of $6.0 billion and $5.2 billion in 2020 and 2021, respectively. Disney now sits on almost $13 billion in cash. Its debt-to-asset ratio of 0.25 also seems reasonable and manageable.
- Efficiency and Profitability: Currently, Disney has gross margin of 34% vs. the industry’s 36% which, while not necessarily bad, is short of inspiring. The return on equity (ROE) of 1.5% is below the industry average of 2.7%, which could imply fewer competitive advantages that allow Disney to protect its bottom line. The return on invested capital (ROIC) is 3.2% vs. 9.1% for the industry average. Considering that Disney’s cost of capital is 8%, ROIC below this level suggests that Disney has work to do to make its business model more compelling.
- Valuation: Disney may be a great company, but the stock’s rich valuation leaves little to the imagination of bargain hunters. Despite having dropped more than 30% this year alone, Disney stock currently trades at 61 times its earnings. Keep in mind, however, that an expensive stock today does not mean that it will be a bad investment tomorrow.
- Momentum: Disney stock has not been enjoying positive momentum over the past year. Stocks with stretched valuation multiples have suffered the most from the unfavorable macro environment. Disney has also been struggling to beat the performance of the entertainment and media industry over the last twelve months. DIS delivered losses of 42% in one year. However, in the last three months, Disney shares have risen 12%, erasing just a bit of the previous losses.
The Bottom Line
Overall, Disney remains a great company with robust fundamentals. But 2022 has been bearish for the stock market as a whole. Things have been even tougher for Disney, as its steeper-than-market decline can probably be explained by worse-than-expected performance in the past few quarters.
However, Q3 earnings season helped to instill confidence in investors after Disney reported an all-around beat. The company delivered growth in streaming – surpassing Netflix (NFLX) – Get Netflix Inc. Report users for the first time – and a progressive increase in park revenues, as the pandemic slowly stays behind.
I think that Disney stock could find a floor in the foreseeable future. However, I also believe that it may take time for Disney share price to reach early 2021 levels anytime soon, which would imply share price appreciation of 75%.
Considering that the current inflationary cycle is still far from ending, it is likely that stocks with stretched valuation multiples such as Disney’s will continue to suffer from rising interest rates and weakened consumer firepower in the short term. In other words, things could get a bit worse before they get much better.
Explore More Data And Graphs
Many of the graphs used by the Apple Maven are provided by Stock Rover. We have been impressed with the breadth and depth of information on markets, stocks and ETFs that this platform provides. Stock Rover also helps to set up detailed filters, track custom portfolios and measure their performance relative to a number of benchmarks.
To learn more, check out stockrover.com and get started for as low as $7.99 a month. The premium plus plan that we have will give you access to all the information that goes into our analysis and much more.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the MavenFlix)