1 risky stock you might not want to touch right now

Amid a sudden change at the helm and challenged by losses in its streaming business, Disney ( DIS ) has plenty of near-term uncertainty to contend with. Let’s discuss why the stock is best avoided now. Read on….

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The media and entertainment giant, The Walt Disney Company (HAZE) had apparently come full circle three weeks ago when the company’s board decided on Sunday, November 20, to let go of Bob Chapek as CEO to announce return of predecessor Robert A. Igerto run the company with immediate effect.

With this move, DIS has effectively replaced Mr. Iger’s handpicked successor with Mr. Iger himself. After leading the company for fifteen years, from 2005 to 2020, he has been given two years to find a successor again and at the same time steer the company on the right track during a key period in the company’s 99-year history.

One of Mr. Iger’s priorities would be to plug the holes in DIS’s direct-to-consumer division, which has been losing money at a rapid pace.

As part of its overhaul strategy, DIS is expected to strengthen its operational control over HULU by acquiring Comcast Corporation’s (CMCSA) remaining 33% stake in the streaming services. In a further push towards profitability, on December 8, DIS officially launched the Disney+ ad-supported tier for $7.99 per month, $3 per month less than the ad-free version.

Despite DIS’s efforts to reposition itself in the streaming landscape by making its services profitable and accessible, macroeconomic headwinds threaten to dampen its short-term outlook. Amid increased competition from other streaming service providers, rising interest rates and fears of an imminent economic downturn, subdued demand and declining discretionary spending may hinder DIS’s recovery plans.

Here are the factors that may affect the performance of DIS in the short term.

Unsatisfactory financial performance

For the fiscal fourth quarter ended October 1, 2022, DIS reported net income of $254 million, down 0.8% year over year. During the same period, the company’s EPS was flat at $0.09. Its total current assets stood at $29.10 billion as of October 1, 2022, compared to $33.66 billion as of October 2, 2021.

Poor profitability

DIS’s subsequent 12 months gross profit margin of 34.24% is 32% lower than the industry average of 50.32%. The company’s trailing 12-month EBITDA and net income margins of 14.5% and 3.8% are 23.5% and 15.7% lower than the industry average of 18.95% and 4.51%, respectively.

In terms of the trailing 12-month ROCE, ROTC and ROTA, DIS also outperforms the industry averages of 6.18%, 4.13% and 2.30% with 43.7%, 35.6% and 32.8% respectively.

Bearishness in share price action

DIS’s stock is currently trading below its 50-day and 200-day moving averages of $97.54 and $109.95, respectively, indicating a bearish trend. The stock has fallen 40.4% year-to-date to end the last trade at $93.38.

Extended valuation

Despite the downward price momentum, the stock still trades at a premium compared to its peers. In terms of forward P/E, DIS is currently trading at 22.33x, 52.9% higher than the industry average of 14.61x. The stock’s forward EV/Sales multiple of 2.46 is 32.8% higher than the industry average of 1.85, while its forward EV/EBITDA multiple of 14.27 is 74.3% higher than the industry average of 8.19.

The stock’s forward Price/Sales multiple of 1.87 also compares unfavorably with the industry average of 1.23.

POWR ratings reflect weakness

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

Our proprietary rating system also evaluates each stock based on eight different categories. DIS also has a D grade for value and quality, due to its stretched valuation and lower profitability compared to its peers.

DIS is ranked as No. 12 out of 16 shares in Entertainment – ​​Media producers industry.

In addition to what is discussed above, you can find additional growth, stability, momentum and sentiment ratings for DIS here.

The bottom line

Although DIS’s size, history and global appeal make it well-positioned to remain a long-term player, its near-term outlook looks bleak due to macroeconomic turbulence.

Analysts expect the company’s fiscal first quarter EPS to decline 24.5% year-over-year to $0.80. In addition, it has missed consensus EPS estimates in two of the last four quarters.

Additionally, given its poor profit margins and high valuation, it would be wise to avoid the stock now.

How does The Walt Disney Company (DIS) stack up against its peers?

DIS has an overall POWR rating of D, which corresponds to a sell rating. Therefore, you might consider looking at its industry peer, AMC Networks Inc. (AMCX), which has a B (Buy) rating.

DIS shares rose $0.30 (+0.32%) in premarket trading on Monday. So far this year, DIS has fallen -39.71%, against an increase of -16.24% in the benchmark S&P 500 in the same period.

About the Author: Santanu Roy

After becoming fascinated by the traditional and evolving factors that influence investment decisions, Santanu decided to pursue a career as an investment analyst. Before switching to investment analysis, he was a process associate at Cognizant. With a master’s degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.


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