Should Investors Buy Falling Walt Disney Stocks?

The Walt Disney Company (SAY -1.98%)which is famous around the world for its top-class theme parks, movies and TV shows, has seen its stock price plummet 30% since the start of 2022.

The company has taken shareholders on a rollercoaster ride in recent years, falling to a five-year low in March 2020 and hitting nearly $200 per share a year later in March 2021. Today, the stock is facing a pressure from macro headwinds such as high inflation. , rising interest rates and fears of a possible recession in the near future.

As an entertainment-focused consumer discretionary company, Walt Disney is particularly vulnerable to market turbulence. Soaring inflation and worries about a recession may cause consumers to spend less money on non-essential goods and services like Disney’s theme parks and streaming platforms.

That said, investors with extended time horizons might consider ignoring this short-term noise and focusing on the underlying fundamentals of the business. Let’s take a closer look.

Image source: Getty Images.

A deep dive into the fundamentals

Walt Disney reported a mixed Q2 2022, ending largely in line with analysts’ revenue forecasts, but missing earnings estimates by 9%. The sprawling media and entertainment company increased total sales 23.3% year-over-year to $19.2 billion, and its adjusted earnings per share (EPS) jumped 36.7% at $1.08.

The company’s Disney Media and Entertainment Distribution segment, which accounted for 71% of its revenue in the second quarter, grew 9.5% to $13.6 billion, and its Disney Parks, Experiences and Merchandise category soared 110% to $6.7 billion, on milder COVID concerns compared to a year ago.

The company’s operating margin increased 343 basis points to 19.2%, resulting in operating profit of $3.7 billion. At a time when one of its main competitors, netflix, facing growing pains, Walt Disney continued to make progress on the streaming front. Now, with over 205 million subscribers split between Disney+, ESPN+ and Hulu, the media and entertainment juggernaut is well on its way to becoming the new king of streaming.

In the second quarter, Disney+ subscriber numbers grew 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 FY2024. While Walt Disney’s streaming services are still developing and facing immense outside competition, the rest of its business serves as a strong backbone moving forward.

Walt Disney’s valuation has normalized

The company’s latest setback has done its valuation a favor. Right now, 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 looks very reasonable, provided that meets analysts’ consensus forecast for Adjusted EPS growth of 90% in fiscal 2022.

This level of growth, combined with its wide moat and generally stable business, in my opinion justifies a higher valuation for Walt Disney. And with the stock now significantly below its 52-week high, investors have also been given a strong margin of safety.

Graph of DIS PE ratio (before)

DIS PE report (front) given by Y-Charts

A solid buy today

As a long-term investor, the short-term headwinds of inflation, interest rates, and a potential recession don’t really change my opinion of Walt Disney. In fact, the stock’s recent selloff has provided investors with a solid entry point and a comfortable margin of safety.

Overall, the company’s second quarter performance was strong – its theme parks are rebounding and its streaming services continue to grow at a rapid pace. Between its declining valuation, strong financial performance, and unrivaled global recognition, it’s reasonable to assume that Walt Disney will be a good stock to own down the road.

Robert D. Coleman