The Walt Disney Company (DIS -0.04%), which is celebrated globally for its first-class theme parks, movies, and television shows, has witnessed its stock price sink 30% since the start of 2022.
The company has taken shareholders on a roller-coaster ride in recent years, falling to five-year lows in March 2020 and reaching nearly $200 a share a year later in March 2021. Today, the stock is facing pressure from macro headwinds like high inflation, rising interest rates, and fear of a potential recession in the near future.
As a consumer discretionary business geared toward entertainment, Walt Disney is particularly vulnerable to market turbulence. Soaring inflation and concerns about a recession may prompt consumers to spend less money on non-essential products and services like Disney's theme parks and streaming platforms.
That said, investors with prolonged time horizons might consider ignoring this short-term noise and focus on the underlying fundamentals of the company. Let's take a closer look.
Image source: Getty Images.
A deep dive into the fundamentals
Walt Disney reported a mixed Q2 2022, finishing largely in line with analysts' revenue forecasts, but missing earnings estimates by 9%. The sprawling media and entertainment company grew total sales by 23.3% year over year to $19.2 billion, and its adjusted earnings per share (EPS) surged 36.7% to $1.08.
The company's Disney Media and Entertainment Distribution segment, which represented 71% of its top line in Q2, expanded 9.5% to $13.6 billion, and its Disney Parks, Experiences and Products category climbed 110% to $6.7 billion, driven by softer COVID-related concerns compared to a year ago.
The company's operating margin increased 343 basis points to 19.2%, translating to an operating profit of $3.7 billion. During a time when one of its primary competitors, Netflix, is facing growing pains, Walt Disney continued to make headway on the streaming front. Now with more than 205 million subscribers spread among Disney+, ESPN+, and Hulu, the media and entertainment juggernaut is on a convincing path to become the new streaming king.
In the second quarter, the number of Disney+ subscribers rose 32.9% to 137.7 million, and CEO Bob Chapek noted that the company is still on track to reach 230 million to 260 million subscribers by fiscal year 2024. While Walt Disney's streaming services are still developing and face an immense amount of outside competition, the rest of its business serves as a solid backbone moving forward.
Walt Disney's valuation has normalized
The company's latest pullback has done its valuation a favor. At the moment, the stock is trading at 27 times forward earnings, mostly on par with its five-year average price-to-earnings multiple of 30. The entertainment company's valuation also appears very reasonable, provided that it meets analysts' consensus forecast of 90% adjusted EPS growth in fiscal 2022.
This level of growth, combined with its wide moat and generally stable business, warrants a premium valuation for Walt Disney, in my opinion. And with the stock now significantly below its 52-week high, investors have been granted a strong margin of safety as well.
DIS PE Ratio (Forward) data by YCharts
A solid buy today
As a long-term investor, short-term headwinds related to inflation, interest rates, and a potential recession don't really change my opinion on Walt Disney. In fact, the stock's recent sell-off has provided investors with a solid entry point and comfortable margin of safety.
Overall, the company's Q2 performance was sound -- its theme parks are bouncing back, and its streaming services continue to grow at a rapid clip. Between its shrinking valuation, solid financial performance, and unrivaled global brand recognition, it's safe to assume that Walt Disney will be a good stock to own down the road.
