The entertainment and media industry has been under immense pressure lately due to several macroeconomic headwinds. Over the past year, spending for entertainment and recreational activities declined as persistently high inflation discouraged discretionary spending. Also, the industry is suffering from intense competition for streaming service subscribers.
Despite near-term macro uncertainty, the entertainment industry is poised to witness robust growth and expansion in the long run, driven by high demand for online entertainment. Hence, investors could hold AMC Networks Inc. (AMCX) and wait for a better entry point in this stock. Conversely, avoiding struggling The Walt Disney Company (DIS) could be wise now.
Since last year, macroeconomic pressures led to a surge in production costs, declining ad revenues, and the dropping of hundreds of billions of dollars in value from entertainment and media giants. The industry’s ability to improve revenue depends on consumers’ willingness to spend on entertainment, which has trembled since inflation hit its historic high in June 2022.
The Consumer Price Index (CPI) increased just 0.1% in May, bringing the annual rate down to 4% from 4.9% in April. However, core inflation, which omits volatile food and energy prices, rose 0.4% monthly and remained 5.3% higher than a year ago, signaling that while price pressures have eased a little, consumers are still under fire.
According to Morning Consult data, consumers have mostly cut back on one-off entertainment purchases such as movie tickets and video games than on subscription expenses over the past year.
In 2023, streaming video services, social media, and gaming continue to enable new business models and reshape the entertainment industry. Last year, viewership for subscription video-on-demand (SVOD) services in the U.S. finally surpassed cable and broadcast TV.
Moreover, leading U.S. providers have established global footprints, and entertainment companies in several countries have launched their own domestic SVOD offerings. But operational costs are high, and competition for subscribers is intense. Amid the uncertain economic landscape and anticipated high subscription cancellations, most U.S. streamers provide cheaper, as-supported tiers.
As per a report by Fortune Business Insights, the global video streaming market is expected to reach 1.90 trillion by 2030, growing at a 19.3% CAGR. The rising internet connectivity worldwide and the increasing popularity of over-the-top (OTT) media services and social media platforms should boost the market’s growth.
While avoiding fundamentally weak entertainment and media stock DIS could be wise now, investors could add AMCX to their watchlist and wait for a better entry point in this stock.
Let’s discuss the fundamentals of these stocks in detail.
Stock to Hold:
AMC Networks Inc. (AMCX)
AMCX owns and operates a suite of video entertainment products delivered to audiences and a platform for distributors and advertisers in the United States and internationally. The company operates in two segments, Domestic Operations; and International and Other. Its brands include targeting streaming services AMC+. Acorn TV, Shudder, ALLBLK, and HIDIVE.
In terms of forward non-GAAP P/E, AMCX is currently trading at 1.65x, 88.6% lower than the industry average of 14.47x. Likewise, its forward EV/Sales of 1.03x is 43.6% lower than the industry average of 1.83x. In addition, the stock’s forward Price/Sales multiple of 1.16 is 85.1% lower than the industry average of 1.16.
AMCX’s trailing-12-month EBIT margin of 18.74% is 119.9% higher than the industry average of 8.52%. Its trailing-12-month EBITDA margin of 22.30% is 23.4% higher than the industry average of 18.08%. Also, the stock’s trailing-12-month ROTC of 8.59% is 124.5% higher than the 3.83% industry average.
For the first quarter that ended March 31, 2023, AMCX’s revenues rose 0.7% year-over-year to $717.45 million, primarily driven by increased distribution and other revenues partly offset by lower advertising revenues. Its adjusted operating income grew 2.2% from the year-ago value to $216 million. Adjusted operating income benefited from significant cost reduction.
Furthermore, adjusted net income attributable to AMCX’s stockholders increased 3.4% year-over-year to $114.73 million, while adjusted EPS attributable to AMCX’s stockholders came in at $2.62, up 3.2% year-over-year.
Analysts expect AMCX’s revenue for the fiscal year (ending December 2023) to decrease 6.4% year-over-year to $2.90 billion. The company’s EPS for the current year is expected to decline 23.9% year-over-year to $7.01. In addition, AMCX’s revenue and EPS for the fiscal year 2024 are estimated to decrease 0.3% and 1.2% from the prior year to $2.89 billion and $6.93, respectively.
Shares of AMCX have slumped 4.3% over the past month and 19.8% over the past six months to close the last trading session at $11.61.
AMCX’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AMCX has a B grade for Value and Quality. It has a C grade for Growth. The stock is ranked #6 out of 13 stocks in the Entertainment – Media Producers industry.
To access additional ratings for AMCX’s Sentiment, Stability and Momentum, click here.
Stock to Avoid:
The Walt Disney Company (DIS)
DIS operates as an entertainment company worldwide. The company operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products. It engages in film and episodic television content production and distribution activities and operates television networks under the ABC, Disney, Freeform, FX, Fox, and Star brands.
DIS’ forward non-GAAP P/E of 22.63x is 56.5% higher than the industry average of 14.47x. And the stock’s forward EV/EBITDA multiple of 13.94 is 66.6% higher than the industry average of 8.37. Moreover, its 1.82x forward Price/Sales is 56.2% higher than the industry average of 1.16x.
DIS’ trailing-12-month gross profit margin of 33.04% is 33.4% lower than the industry average of 49.59%. Also, the stock’s trailing-12-month EBITDA margin and levered FCF margin of 14.56% and 6.02% compare to the industry averages of 18.08% and 7.35%, respectively.
For the second quarter that ended April 1, 2023, DIS’ costs and expenses increased 10.7% year-over-year to $19.54 billion. The company’s after-tax income, excluding certain items, declined 9% year-over-year to $1.92 billion, and its EPS, excluding certain items, came in at $0.93, down 13.9% year-over-year.
In addition, the company’s cash outflow from investing activities-continuing operations grew 25.5% from the year-ago value to $2.54 billion. As of April 1, 2023, its cash and cash equivalents were $10.40 billion, compared to $11.62 billion as of October 1, 2022.
Over the past year, the stock has plunged 7.4% to close the last trading session at $88.83.
DIS’ POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
DIS has a D grade for Momentum. Within the same industry, the stock is ranked #9 among 13 stocks.
Beyond what is stated above, we’ve also rated DIS for Value, Stability, Sentiment, Quality, and Growth. Get all DIS ratings here.
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DIS shares fell $0.37 (-0.42%) in premarket trading Thursday. Year-to-date, DIS has gained 2.24%, versus a 14.97% 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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