Leading entertainment company Walt Disney Co. (DIS) operates parks, media and entertainment distribution, and three content groups—studios, general entertainment, and sports—that are focused on developing and producing content for DTC, theatrical and linear platforms. Shares of this Burbank, Calif.-based media giant are down 13.2% in price year-to-date. Over the past month, the stock has slumped 10.8% to close yesterday’s trading session at $157.33. Furthermore, the stock is currently trading below its 50-day and 200-day moving averages.

Several operational disruptions have taken a toll on the company due to the COVID-19 pandemic and consequent lockdowns that necessitated the closure of its theme parks and suspension of its cruise line departures. The company incurred significant revenue losses. However, its Disney+ streaming service thrived. The "Black Widow", which debuted on Disney+, took in $80 million in domestic box office receipts in its opening weekend, making it the biggest premiere since the pandemic began.

DIS shares plummeted 7% in price on November 11, marking it their worst session since June 2020, after the company reported a slowdown in subscriber growth for its streaming service. The company also missed consensus estimates for its top and bottom lines in its last reported quarter. Disney added 2.1 million Disney+ subscribers to hit 118.1 million, in line with CEO Bob Chapek's prediction of “low single-digit millions” of fourth-quarter streaming subscribers back in September. Also, DIS is facing competitive threats from Netflix Inc. (NFLX) and Amazon.com, Inc. (AMZN).

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

Lofty Valuation

In terms of forward P/E, DIS is currently trading at 43.55x, which is 110% higher than the 20.74x industry average. Also, its 22.11 forward EV/EBITDA ratio is 126.6% higher than the 9.76 industry average. DIS’ 43.81x forward Price/Cash Flow is 307.7% higher than the 10.75x industry average.

Bleak Profitability

DIS’ 5.43% gross profit margin is 89.5% lower than the 51.66% industry average. Also, its 2.96% net income margin is 54.9% lower than the 6.55% industry average.

DIS’ 2.35%, 0.98%, and 1.45% respective ROE, ROA, and ROT compare with the 9.36%, 3.01%, and 4.28% industry averages.

Solid Year-Over-Year Growth

DIS’ revenues increased 26% year-over-year to $18.53 billion in its fiscal fourth quarter, ended October 2. Its income from continuing operations before income taxes stood at $290 million, up substantially from its negative year-ago value. Its net income from continuing operations grew 122.5% from the year-ago loss to $160 million, and the company’s adjusted EPS increased 285% year-over-year to $0.37. In addition, its cash provided by continuing operations and free cash flow came in at $2.63 billion and $1.52 billion, respectively, indicating increases of 58% and 62% year-over-year.

POWR Ratings Reflect Uncertainty

DIS has an overall C rating, translating to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

DIS has a C grade for Stability. This is in sync with its 60-month beta of 0.99.

The stock has a D grade for Value, which is consistent with its stretched valuation.

Of the 13 stocks in the Entertainment – Broadcasters industry, DIS is ranked #11.

Beyond what I have stated above, one can also view DIS’ grades for Quality, Growth, Momentum, and Sentiment here.

Bottom Line

Given the worldwide popularity of DIS and its high growth potential, the company is expected to grow significantly over the long term. However, its near-term prospects look uncertain. The entertainment company has reported a significant slowdown in its subscriber sign-ups, while its entertainment parks and cruise line are expected to take some time before they return to full operational  capacity. Thus, considering DIS’ low-profit margins and lofty valuation, is why we think it wise to wait for a better entry point in the stock.

How Does Walt Disney Co. (DIS) Stack Up Against its Peers?

While DIS has an overall POWR Rating of C, one might want to consider looking at its industry peer, Entravision Communications Corporation (EVC), which has a B (Buy) rating.

DIS shares were trading at $155.00 per share on Thursday morning, down $2.33 (-1.48%). Year-to-date, DIS has declined -14.45%, versus a 26.57% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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