Timing the market has proven exceedingly difficult. After all, no one has a crystal ball that tells you when a stock has bottomed out or reached a zenith. But fundamental analysis of individual companies can improve long-term investors' odds of success. It requires examining a company's prospects and valuation to determine whether the stock represents a buying opportunity.
Walt Disney (DIS -0.58%) has hit a rough patch and is worth such an examination. Should you buy the media giant's stock now?
Image source: Getty Images.
Trying to right streaming
Back in February, CEO Bob Iger promised that Disney's streaming business would become profitable. And he's made progress on that front. The direct-to-consumer unit reported a $512 million loss in the fiscal third quarter (ended July 1), about half the year-ago figure. Revenue rose by 9% to $5.5 billion.
Paid subscribers fell by over 5% from the previous quarter, to 219.6 million, across its streaming services. Management has decided to implement another price increase in an effort to boost revenue per paid subscriber. While competitors like Netflix have been boosting prices, the effect on Disney's subscriber growth, already under pressure, remains unclear.
Networks and parks
Disney's linear networks, consisting of cable and television networks such as Disney Channel, ESPN, and ABC, continues to struggle. In fact, Iger has been looking into selling the business, or at least some of the assets. In Q3, the business saw a revenue decline of 7% from a year ago, and operating profit dropped by 23%.
While some of the networks, such as A&E, FX, and National Geographic, may not fit with the rest of Disney's business, it's hard to separate certain assets like ABC and the Disney Channel from the overall brand. It's tough to see what the business may look like until management makes certain decisions.
It's not all uncertainty and bad news for Disney's business, however. Theme parks have been a bright spot. In the third quarter, the parks, experiences, and products division enjoyed a 13% revenue increase. Theme park admission revenue grew by 18%, with more than two-thirds coming from increased attendance.
Still, should the economy dip into a recession, theme park attendance and spending will undoubtedly get impacted.
Valuation
Disney's stock price has fallen by 7.1% since the start of the year compared to the S&P 500's 8.5% gain. That has brought down the stock's valuation. The shares trade now at a price-to-sales (P/S) ratio of 1.7, down from about 2.5 earlier this year. By contrast, the S&P 500 sells at a 2.3 P/S multiple.
While Disney stock may seem like a bargain at this level, it's important to remember the company's challenges. With intense competition in streaming, price increases alone won't achieve profitability. And the linear networks business faces an uncertain future as it's unclear what will remain if and when management sells assets.
With that, I'd take a pass on Disney's stock until the company has tangible signs of progress such as achieving sustained profitability in the streaming business and seeing how the linear network business shapes out.
