None of the problems that have plagued Disney (NYSE:DIS) for several years appears to have eased recently. Meanwhile, CEO Bob Iger’s efforts to right the ship will not move the needle sufficiently to boost DIS stock, and the firm is facing significant new challenges while its valuation remains elevated. Given these points, I recommend that investors sell the shares.
Disney’s Fundamental Problems Remain
For years, I’ve warned that cord-cutting would prove to be a tremendous blow to Disney and DIS stock. Due to the phenomenon, Disney has lost a large amount of profits as the automatic windfall that it earns from cable subscribers fell sharply.
And while Disney+ subscriber gains entranced the Street, I noted that, far from being able to replace the profits that Disney was shedding due to cord-cutting, the firm’s streaming channels were losing money and were likely to continue doing so for years.
If anything, those issues appear to be intensifying as the conglomerate’s earnings per share from continuing operations, excluding some items, fell to $2.94 in the first three quarters of 2023 from $3.22 in the same period a year earlier.
Moreover, the operating income of its Media and Entertainment unit, which includes its TV networks, sank 18% year-over-year last quarter. In contrast, the operating loss of its direct-to-consumer unit, which includes its streaming channels, came in at $512 million.
Iger’s Solutions Won’t Put DIS Back on the Right Track
In order to get Disney back to its winning ways, the firm would have to make huge changes in its business model, in my view. And so far, Iger has shown little or no inclination to make such huge alterations.
Instead, for the most part, he’s focused on relatively small changes, such as implementing layoffs and copying Netflix (NASDAQ:NFLX) by deciding to crack down on password sharing. Further, he’s reportedly looking to sell several of the company’s TV assets, a move that will keep Disney financially healthy longer but will also meaningfully lower its top and bottom lines.
Iger’s decision to partner with Penn Entertainment (NYSE:PENN) on sports betting represented the right strategy but the wrong tactics. If ESPN had gone all-in on sports betting itself or acquired Penn (or better yet, one of its larger competitors), the move into betting could have been a huge, positive catalyst for DIS stock over the longer term.
However, as a result of the deal that Iger made, Disney will only obtain “$1.5 billion in cash” through 2033 and roughly $500 million of PENN stock. Like Iger’s layoffs and his sale of TV assets, the transaction will improve Disney’s balance sheet but will do little or nothing for DIS stock.
More promising is Disney’s potential partnership with Amazon (NASDAQ:AMZN). Specifically, the companies are looking to develop a “streaming version of ESPN.” The huge reach of Amazon’s brand and the gigantic amount that it could spend on marketing ESPN could be meaningfully upbeat for Disney. But the deal could also accelerate the cord-cutting trend, diluting the net positive impact on the company’s bottom line. I will wait to see whether the deal materializes and evaluate the details of any transaction before making any changes to my assessment of DIS stock.
New Problems
In recent years, Parks has been Disney’s only bright spot. For example, the unit’s operating income jumped 11% YOY to $2.42 billion last quarter. But now the “revenge travel” trend is slowing, implying that Parks’ growth will start decelerating.
Moreover, the company intends to invest $60 billion in Parks over the next decade, “nearly double that in the previous 10-year period,” Seeking Alpha reported. The spending hike is likely to wipe out most or all of the savings that the company will obtain from Iger’s cost-cutting moves.
And in more ominous news for Disney, Charter (NYSE:CHTR), one of the country’s largest cable providers, recently forced the conglomerate “to drop eight of its less-viewed networks” from Charter’s offerings. Since Disney obtains revenue from each cable subscriber receiving its channels, the move is likely to meaningfully reduce Disney’s top and bottom lines.
That’s especially true because America’s other large cable companies will likely follow in Charter’s footsteps.
The Bottom Line on DIS Stock
Disney’s forward price-earnings ratio of 16.2 is still way too high, given all of the company’s steep challenges.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
