Shares of the world’s largest entertainment company, The Walt Disney Company (DIS), have gained significantly over the past few years. Its solid stock price performance can be attributed primarily to the excellent performance of the company’s direct-to-consumer business—with a total of nearly 174 million subscriptions across Disney+, ESPN+, and Hulu at the end of the third quarter—and a host of added content on each platform.

However, DIS CEO Bob Chapek recently said that the new Disney+ subscribers in the current fiscal year might be in the “low single-digit millions,” because it faces stiff competition from other players such as Netflix Inc. (NFLX) and Apple Inc. (AAPL) in the streaming space. 

The stock has declined 4.7% in price over the past six months to close Friday’s trading session at $176. In addition, it is currently trading 13.3% below its 52-week high of $203.02, which it hit on March 8, 2021. Furthermore, the rising COVID-19 cases owing to the rapid spread of the Delta coronavirus variant make the company’s near-term outlook uncertain due to capacity limitations and production delays.

Here’s what could influence DIS’ performance in the coming months:

COVID-19 Pandemic-Related Headwinds

DIS is expected to continue incurring additional costs to address government regulations and implement safety measures for their employees, talent, and guests concerning the COVID-19 measures. The timing, duration, and extent of these costs will depend on the timing and scope of their operations as they resume. The company currently expects these costs to total  approximately $1 billion in its fiscal year 2021.

Solid Financials

DIS’ revenues surged 48.7% year-over-year to $17.02 billion for its fiscal third quarter, ended July 3, 2021. In addition, its total segment operating income grew 116.7% year-over-year to $2.38 billion. The company’s free cash flow came in at $528 million, representing a 16% year-over-year increase. Also, its EPS was  $0.80, up 900% year-over-year.

Lofty Valuation

In terms of forward P/CF, DIS’ 50.96x is 393.6% higher than the 10.32x industry average. Likewise, its 70.23x forward non-GAAP P/E is 257.4% higher than the 19.65x industry average. Furthermore, the stock’s forward EV/EBITDA and P/S of 34.12x and 4.72x, respectively, are higher than the  9.96x and 1.83x  industry averages.

POWR Ratings Don’t Indicate Enough Upside

DIS has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct 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 D grade for Value, which is in sync with its higher-than-industry valuation ratios.

The stock has a D grade for Quality. This is justified because DIS’ trailing-12-month ROCE, ROTC, and ROTA of 1.34%, 0.96%, and 0.56%, respectively, are lower than the 8.48%, 4.31%, and 2.68% industry averages.

DIS is ranked #8 of 12 stocks in the Entertainment - Broadcasters industry. Click here to access DIS’ ratings for Growth, Momentum, Stability, and Sentiment as well.

Bottom Line

Even though DIS reported impressive second-quarter earnings results, its near-term prospects seem uncertain because of the growing number of COVID-19 cases. In addition, hedge fund’s interest in the stock has declined  lately. So, the stock looks overvalued at its  current price level, and we think it could be wise to wait for a better entry point in the stock.

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

While DIS has an overall POWR Rating of C, one might want to consider investing in the following Entertainment - Broadcasters stocks with a B (Buy) rating: Scienjoy Holding Corporation (SJ), Grupo Televisa S.A. (TV), and Nexstar Media Group, Inc. (NXST).

DIS shares were unchanged in after-hours trading Monday. Year-to-date, DIS has declined -1.61%, versus a 19.55% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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