The Walt Disney Company (NYSE: DIS) was one of the stocks that had an especially rough year. Its stock took a heavy beating, falling by 37% in the last 12 months, in comparison to the 5.5% drop of the S&P 500. In fact, this performance had led the Walt Disney Stock to be labeled as the worst Dow Jones stock of the year. Needless to say, however, the previous month brought in quite a turnaround. Mid-June saw both the S&P 500 and Disney hit a bottom, after which each has been on a rise. Where the last month saw the S&P climb by 11%, Disney’s price surged by an impressive 17%.
Many claims that this growth trend is a result of the subsiding headwinds, and the future implications it has for the stock’s prospects. As Disney’s next earnings release approaches nearer, bulls will continue to rally, and drive up prices to where they believe the stock stands. In this article, we discuss whether Disney is worth buying before its imminent earnings release.
Explaining the Disney Fall
The fall of Disney has many factors that explain its occurrence, which range from the micro to the macro. The most direct trigger to its price plummet was the wider bear market conditions that had seen the entire market reverse its pace and begin a sudden descent. These bearish conditions had come about given the severe macroeconomic headwinds, involving inflation, as a result of the post-Covid demand surge, with industries across the globe unable to cope.
The Bigger Picture
Such conditions had further been exacerbated by Russia’s invasion of Ukraine, and the supply chain complications that had come about as a result. Sanctions on Russian oil and gas further triggered inflationary pressures to erupt beyond record high levels of several decades. Disney, which was far from being an essential service, was caught up in this panic-induced mass selloff. Investors were hesitant to hold a stock like Disney, which was far from being a crisis stock. With the fears of a looming recession, there was even less reason for investors to latch onto DIS. Consumer spending is typically the first to be impacted during such conditions. Shareholders evidently dumped DIS for more robust and resilient names in the market.
Falling Walt Disney Stock Earnings
Walt Disney Stock’s earnings results of the prior quarters did not inspire much confidence to challenge such bearish perceptions towards the stock. Its quarter 2 results for the year reported an EPS figure of $1.19 per share. Even though this earnings figure stood at a 37% year-on-year increase, shareholders remained disappointed as it still stood 33% below its EPS from 2019. This understandably presented alarm bells, as it indicated Walt Disney as still being unable to financially recover from the impacts of Covid-19 when industries across the globe had seen an impressive boom. To add, operating income from its Media and Entertainment Distribution segment had seen a fall in its recent release. This suggested that the decline in performance was not limited to travel restrictions to the company’s theme park locations.
As if the circumstances were not tough on the company as they were, Disney found itself involved in serious controversy. Unfortunately for company shareholders, this further led to investors distancing themselves from the company. The “Parental Rights in Education” bill, introduced in Florida, sparked serious controversy, given it being labeled by some as being anti-LGBT. Disney’s response to this was not received well by either side of the debate. Supporters of the bill accused the company of overarching and attempting to act in a political manner. Those opposing the bill criticized Disney for not doing enough beyond a token statement.
Upcoming Earnings Release
The earnings release for Walt Disney Stock’s third quarter of the year is widely being awaited by the market at large. This critical update, especially in terms of its bottom line would essentially act as a make-or-break for the company. Its entire future growth trajectory is largely dependent upon how it has performed in the prior three months. Analysts have set a consensus EPS estimate of $0.99 per share, which would reflect a 24% year-on-year increase. Growth is expected to take a similar course, and rise 23% year-on-year, to deliver $21 billion.
Given the ground realities, many optimistically expect DIS to surpass these expectations and finally make its comeback. For one, on the basis of published reports, numbers at Disney’s various theme parks are shown to be at record highs throughout the year, in Florida, California, as well as in Miami. Coupling this with the inflation effect, revenue is likely to see a surge in comparison to its prior-year figures. Inflation would not just be limited to tickets, but every service within the location, such as food and beverages. The result of this is likely to be a multiplier effect, which could potentially result in exponentially growing revenue.
To add, demand for leisure activities has been at record levels in the prior year, with Q3 capturing a significant portion of that. The fact that the company’s core parks and resort businesses have been the main money maker for the company does give quite some reason to be hopeful and looking forward.
Disney Media and Entertainment Distribution
Even more crucial in the upcoming results would be Disney’s performance in its media and entertainment segment. In particular, all eyes would be on the numbers relating to its streaming services. This is likely to be quite positive, especially considering that last year saw an addition of over 7 million new users to just its Disney+ platform. On its international streaming services, denoting a 39% subscriber surge on a year-on-year basis. Its blockbuster assets such as Marvel reinforce its growth prospects, with a loyal fanbase across the globe.
Market bulls have also been turning an eye towards subsidiary services, likely to add to the company’s profitability. ESPN+, for instance, grew its subscriber base by a whopping 62%. This has pushed the number of its subscribers to 22.3 million. Considering that the company upped its monthly subscription from $7 to $10, the gain is likely to be substantial.
The Disney Buying Opportunity
Given the ground realities, we believe the Q3 results to be quite robust, and likely to surpass the consensus earnings estimate set for Walt Disney Stock. This seems to be the wider view in the market too. In just the last month alone, DIS climbed by 17%, from $91 to almost $110. It was evident that the stock’s mass selloff was largely panic-induced and mismatched to its fundamental realities. This pushes a strong reason to buy the stock at its dip. With the earnings call, a growth spurt could be catalyzed.
With positive news, which seems more likely than not, this momentum could very well see its price jump beyond $130. If record level demand is seen in its park’s segments, and there is an improvement in operating margins in its various segments, there is no stopping the growth engine that will come. This would be the case because such performance metrics would signal a return of the entertainment industry’s undisputed king.
It is important to keep in mind that macroeconomic headwinds still exist, and are far from being eliminated. Although analysts state that inflation levels have peaked, and are on their downward trajectory. That being said, present volatility and market frenzy may still play a part in the future direction of DIS. The easing of crude oil prices seen in global markets does deliver confidence that stability may be approaching.
Consumer sentiment is a critical underlying factor that shapes our decision on DIS. The controversial Florida bill gave the company bad press, which induced a shift away from association with the brand. However, controversies and their impact on share price are temporary, given their disconnect from fundamentals. Disney has established itself as a world-favorite brand, and it is unlikely for controversy to dent its established brand in any permanent manner.
Walt Disney Stock has had a rough ride in the last two years. The next earnings call will be a make-or-break for its stock in the financial markets. Given the trends showcased in the prior months, and the ground realities of demand for its services, we are extremely positive about the news on its earnings to be announced. Walt Disney Stock should be bought before the earnings are out because it is highly likely to take on a rocketing growth trend. This phenomenal rise has a high probability to take place, as a result of the market deeming the once might stock making an epic comeback.