Is Disney a Buy Right Now?

Entertainment giant Disney (NYSE:DIS) is currently facing one of the most difficult periods in its recent history. After struggling through theme park shutdowns a few years ago and a sea change in media consumption as consumers moved toward streaming services, Disney share price plummeted to new lows this year.

The stock is down 5.9% year-to-date and 25% over the past year. The company’s most recent quarterly report revealed a net loss for the first time since 2020.

Disney is, however, historically one of America’s best-performing companies. As such, there’s a strong argument to be made that the current slump presents a buying opportunity for long-term value investors. Indeed, the pre-eminent valuation expert from Columbia University, Prof. Aswath Damodaran seems to agree. Is he right?

4% YoY Revenue Growth Scares Investors

In the most recent quarter, Disney reported a 4 percent year-over-year revenue growth, bringing its quarterly revenue to $22.33 billion.

A key driver of this revenue growth was the Disney parks and experiences segment, which grew by 13 percent to $8.33 billion. This positive news was, however, partially offset by a 1 percent reduction in revenues from Disney’s core media business.

Quarterly earnings told a much less encouraging story. Disney’s earnings per share slumped to -$0.25, down from $0.77 per share a year earlier.

Adjusted EPS was more positive at $1.03 per share but still represented a loss relative to the $1.09 reported in the year-ago quarter. The most recent quarter was the first in which Disney posted a net loss since Q3 of 2020.

In spite of the negative earnings, recently returned CEO Bob Iger highlighted Disney’s progress over the last quarter in his official statement. Specifically, Iger pointed to ongoing cost reductions that Disney projects to save up to $5.5 billion in annual expenses.

This view tracks with the reported expenses, as restructuring and impairment charges rose from just $42 million last year to $2.65 billion in Q3.

Over the coming 12 months, analysts expect Disney’s adjusted earnings to grow by 41.9 percent. Looking at the 5-year time horizon, EPS growth is projected to average a compounded rate of 16.7 percent.

If Disney can achieve these growth rates, it’s very likely that the stock will begin to regain momentum and deliver solid returns to investors.

Fair Value Is A Lot Higher

Despite the company’s struggles, most analysts remain solidly bullish on Disney. So, is Disney stock a buy right now?

The consensus price forecast among 26 analysts is for the stock to rise to $108.96 per share, nearly 35 percent above the most recent price. 19 analysts rate Disney as a Buy.

Disney also appears to be trading at an attractive valuation. At 22.2 times forward earnings, 12.5 times cash flow and just 1.7 times sales, Disney trades at reasonable multiples on most of its key metrics.

It should be noted, however, that Disney will have to return to more robust profitability in order to prove that it’s a bargain at these levels.

With only $1.23 in trailing 12-month earnings per share, Disney is currently earning less than it did in 2010. And the share price reflects that poor performance – the stock is trading at levels it hasn’t seen in a decade.

Nonetheless, if the Iger’s plan to reduce costs and refocus on core growth areas return it to former levels of profitability, Disney could well be a steal at today’s prices.

Losses On Summer Hits Mount

Despite its status as a powerhouse within its industry and its seemingly attractive valuation, Disney’s current performance has shareholders justifiably nervous.

The most glaring example is the estimated $900 million loss that Disney incurred with its list of summer film flops this year. If Disney cannot regain its momentum at the box office, it may lose some of the competitive moat that has kept it at the forefront of the entertainment industry for decades.

Another major red flag for shareholders is the rapid loss of subscribers at Disney+. The streaming platform, once considered a serious challenger to the likes of Netflix, has lost some 11.7 million subscribers over the last three months. Much of this loss was in the Indian market, though North American subscriptions also declined by about 300,000.

A further arrow targeting Disney is lower advertising revenue across its broadcasting network. ABC, now a subsidiary of Disney, saw its marketing costs rise while ad revenues fell in Q2.

Total domestic channel revenue from broadcasting dipped by 4 percent last quarter. This may prove to be a long-term trend as traditional broadcasting increasingly competes with streaming services and online content for advertising dollars.

Weighing the Pros and Cons: Is Disney a Buy Now?

On the plus side for Disney, the company has an indisputable moat within its industry and is implementing cost-cutting measures that could help it return to a much higher degree of profitability in the future. Even with overall profits shrinking, Disney still generates a 6.5 percent return on equity and a 32.8 percent gross margin.

On the downside, Disney is a legacy media company that is facing growing pains as the world moves away from the traditional distribution methods that it has masterfully used up until now.

These struggles can be clearly seen in the losses Disney faces in its legacy broadcasting and media product businesses, as well as the rapid decline in Disney+ subscribers.

Even with real business risks weighing on the company, Disney may be a solid long-term buy for value investors. With at least the potential to regain pre-COVID profit levels under Bob Iger’s leadership, Disney could be substantially undervalued.

Without such a dramatic rebound, it’s likely that Disney is nearing the end of its drop and that the stock could stabilize before drifting gradually higher. As such, Disney has the potential to generate considerable upside while likely carrying more modest downside risk.

Finally, what does Aswath Damodran say about Disney vs Netflix, its arch rival now? You can see he thinks Disney is a better deal at this time.

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