Can Disney’s earnings turn its stock price around? – Stock Markets

1Fev20241002 GMT- Marios Hadjikyriacos

• Disney will release earnings on Wednesday, February 7, after the closing bell

• Earnings expected to stagnate, as streaming continues to lose money

• Shares trading near their lowest levels in a decade, but valuation not cheap

 

Anemic profit growth hits Disney shares

The past decade has been horrible for Disney shares. Despite some recent gains, the stock price is trading near levels seen in 2015 and during the heights of the pandemic, when Disney theme parks were shut and its theatrical releases delayed. 

In other words, investors holding Disney shares have seen almost zero returns over the last 9 years, even though the broader stock market has soared, with the S&P 500 rising a whopping 140% over the same period. 

This dramatic underperformance reflects anemic profit growth, as well as the dilution of shareholders, as Disney issued new shares and took on heavy debt to fund several acquisitions such as its purchase of 21st Century Fox. 

To turn the ship around, Disney launched its streaming service in 2019, entering the direct-to-consumer arena to challenge Netflix. The move was successful, with Disney+ adding over 150 million subscribers so far. The bad news is that this is still a cash-burning business. It lost about $2 billion in the last fiscal year, which was a serious drag on overall profitability. 

Another underwhelming quarter

For the final quarter of 2023, analysts expect Disney to report earnings-per-share of $1.00, which would represent a 1% increase from the same quarter in the previous year. Similarly, revenue is projected to have risen by 0.8% over the same period. 

Make no mistake, these are terrible numbers. Growth at the House of Mouse has stalled out, and the company’s results cannot even keep up with inflation. In essence, streaming losses are being offset by the profits from film studios and theme parks, keeping overall earnings growth sluggish.  

The market reaction will depend on whether the actual results are stronger or weaker than analysts expect, as well as any comments from Disney executives about slashing operating costs and reducing content expenditure to boost profits. 

Taking a look at the charts, Disney shares have regained some ground in recent months. An earnings report that beats estimates could propel the stock even higher, with a break above $97.50 likely to open the door towards the 103.00 region. 

On the flipside, a disappointment might push the market back down. A potential move below $95.00 could bring the 50-day simple moving average under examination, currently at $92.64. 

Valuation is not attractive 

Turning to the valuation, Disney shares are currently trading for 21 times what analysts expect earnings to be over the next year. That’s under the assumption earnings growth will rise by 15% during this period and will continue to boom next year. 

Therefore, the market has already priced in a substantial acceleration in profit growth. This implies Disney needs to exceed these rosy expectations for its share price to move higher. 

For comparison, the S&P 500 trades at 20x forward earnings, so Disney is a little more expensive than the broader market from a valuation perspective. That’s not a ‘bargain’ in any sense, particularly for a company that has consistently struggled to deliver results.   

All told, it’s difficult to get excited about Disney. Streaming losses have narrowed in recent quarters, but investors need to see this segment turning profitable before they can gain confidence in a sustainable turnaround for the company, and its shares.