Disney (DIS): Buy, Sell, or Hold Post Q2 Earnings?

Disney has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 35.4% to $112.80 per share while the index has gained 33.2%.

Is now the time to buy Disney, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Disney Will Underperform?

We're swiping left on Disney for now. Here are three reasons there are better opportunities than DIS and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Disney grew its sales at a sluggish 6.3% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.

2. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict Disney’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 12.2% for the last 12 months will decrease to 8.5%.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Disney historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.6%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

Final Judgment

We see the value of companies helping consumers, but in the case of Disney, we’re out. That said, the stock currently trades at 18.8× forward P/E (or $112.80 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Like More Than Disney

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