Media and entertainment giant The Walt Disney Company (DIS) unveiled its second-quarter results on Tuesday, May 7. While the company exceeded earnings projections due to its cost-cutting initiatives, it failed to meet revenue expectations. Followed by soft guidance, its shares tumbled nearly 10% in its share price.

In this article, we gauge the prospects of this media giant to determine whether the stock deserves a spot in your portfolio or not.

For the second quarter that ended March 30, 2024, DIS’ revenues increased marginally year-over-year to $22.08 billion, falling below the analysts’ estimate of $22.14 billion. This slight miss marks the company’s fourth consecutive quarter of a revenue miss.

Meanwhile, the company’s total segment operating income jumped 17% year-over-year to $3.85 billion, fueled by Disney+ and Hulu's first-ever profitability during the March quarter. Additionally, Disney+ Core subscribers grew by over 6 million to 117.6 million globally, while total Hulu subscribers increased by 1% to 50.2 million.

Revenue from U.S. parks and experiences rose 7% to $5.96 billion, with international sales soaring 29% to $1.52 billion due to increased attendance and higher prices at Hong Kong Disneyland Resort.

On the contrary, DIS’ attributable net loss amounted to $20 million, versus a $1.27 billion net income in the same quarter last year, largely due to $2.10 billion in one-time restructuring and goodwill impairment charges related to a joint venture involving Star India property.

Nonetheless, the company outperformed expectations on an adjusted basis. Adjusted earnings per share stood at $1.21, up 30.1% year-over-year, beating the Wall Street expectation (estimated adjusted EPS of $1.10).

Thanks to double-digit percentage growth in adjusted earnings, the company has revised its full-year EPS outlook, now projecting a 25% year-over-year increase compared to the previous guidance of 20% growth. It also maintains its trajectory to generate around $14 billion in operating cash flow and over $8 billion in free cash flow for the current year.

Shares of DIS have slumped 10.3% over the past month but have gained 20.9% over the past nine months to close the last trading session at $105.80.

In view of the above, we take a deeper look at factors that could shape DIS’ performance this month and beyond:

Segment Performance Seem Messy

Getting into segment specifics, the Experiences division led the way, with revenue rising 10% year over year to $8.39 billion, driven by Disney’s theme parks. Its sports division also saw solid growth, with a 2% increase in revenue.

However, the Entertainment division (which includes movies, streaming, and TV properties) disappointed investors, with revenue falling 5% year over year and 2% sequentially to $9.79 billion. Despite this, direct-to-consumer streaming revenue rose 13% year-over-year, operating at a $47 million profit, a significant improvement from a $587 million loss a year ago and a $216 million loss last quarter.

One of the weakest areas of Disney’s business was content sales and licensing, which saw revenue drop 40%, contributing to the underperformance of the entertainment segment. The company said that the reason for the downbeat performance was “lower theatrical distribution results” compared to last year.

During the analyst call, CEO Bob Iger emphasized the importance of exceptional content for Disney’s streaming success, highlighting several highly anticipated theatrical releases. However, of the ten upcoming releases mentioned, nine were sequels, existing franchise installments, or reboots.

Optimistic Analyst Estimates

The consensus revenue estimate of $23.13 billion for the fiscal third quarter ending June 2024 reflects a 3.6% year-over-year improvement. Moreover, the consensus EPS estimate of $1.20 for the same period exhibits a 15.2% rise from the prior-year quarter. Furthermore, the company topped the consensus EPS estimates in all four trailing quarters, which is excellent.

In addition, for the fiscal year ending September 2024, Disney’s revenue is expected to increase 3.1% year-over-year to $91.62 billion. The company is estimated to post an earnings per share of $4.76 in the current year, exhibiting a 26.5% year-over-year growth.

Mixed Profitability

In terms of the trailing-12-month EBIT margin, DIS’ 12.20% is 49.4% higher than the 8.16% industry average. Likewise, its 5.71% trailing-12-month Capex/Sales is 58.5% higher than the industry average of 3.60%.

On the other hand, its trailing-12-month gross profit and net income margins of 35.03% and 1.90% are 28.9% and 29.2% lower than the 49.24% and 2.68% industry averages, respectively. Similarly, its 1.72% trailing-12-month Return on Common Equity compares unfavorably to the industry average of 3.07%.

Stretched Valuation

In terms of forward non-GAAP P/E, DIS is currently trading at 22.17x, which is 63.2% higher than the industry average of 13.58x. Its forward Price/Sales multiple of 2.11 is 72.4% higher than the industry average of 1.22.

Moreover, its forward EV/EBITDA multiple of 13.39 is 74.9% higher than the industry average of 7.65x. DIS’ forward EV/Sales multiple of 2.59 also exceeds the industry average of 1.82 by 42.4%.

POWR Ratings Exhibit Mixed Prospects

DIS’ stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. DIS has a C grade in Quality, which matches its mixed profitability. Plus, with a 24-month beta of 1.15, the stock has a grade C for Stability.

On the other hand, DIS has a D grade for Value, consistent with its premium valuation multiples.

Within the D-rated Entertainment - Media Producers industry, DIS is ranked #6 out of 12 stocks. Beyond what I have stated above, we have also given DIS grades for Growth, Momentum, and Sentiment. Get all DIS ratings here.

Bottom Line

Despite CEO Bob Iger’s successful restructuring initiatives, Disney’s second-quarter results didn’t spur a significant stock breakout. While revenue projections suggest modest growth ahead, there’s uncertainty about meeting ambitious earnings goals.

A bearish outlook for the company could materialize if top-line growth falters due to consumer pushback against higher theme park prices or declining attendance. Moreover, while Disney+ and Hulu have amassed considerable subscribers, intense competition and the need for increased content investment could challenge recent profitability gains.

Considering DIS’ mixed profitability and relatively high valuation, it may be prudent for investors to await a more opportune entry point.

How Does The Walt Disney Company (DIS) Stack Up Against Its Peers?

While DIS has an overall grade of C, equating to a Neutral rating, you may also check out these other stocks within the Entertainment - Media Producers industry: Vivendi SE (VIVHY) and News Corporation (NWSA), with a B (Buy) rating.

To explore more Buy-rated Entertainment - Media Producers stocks, click here.

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DIS shares were trading at $105.76 per share on Friday afternoon, down $0.04 (-0.04%). Year-to-date, DIS has gained 17.13%, versus a 9.86% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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