Why Disney Stock Is Still a Sell Despite the Upbeat Headlines

Disney’s (NYSE:DIS) cost-cutting and a strong rebound in its International Parks business made its third-quarter results look decent. However, over the longer term, the profits of the company’s TV networks will probably sink sharply, and the firm still has not devised viable ways to offset those likely declines. Given those points, I believe that DIS stock remains overvalued, and I continue to recommend that long-term investors sell the shares.

Some points in this article support my argument that DIS stock is a sell.

Don’t Judge Disney’s Q3 Results by the Headlines

On the surface, Disney’s Q3 results looked pretty good. Specifically, its revenue increased 5% versus the same period a year earlier to $21.2 billion, while its earnings per share, excluding some items, more than doubled to 82 cents from 30 cents in Q3 of 2022.

But a look under the cover shows that the company’s core TV businesses continue to struggle mightily despite the strong U.S. economy and the rebounding TV ad market.

Specifically, the revenue of its most valuable conventional TV asset, ESPN, rose just 1% year-over-year last quarter, while the top line of its other TV networks plunged 9% year-over-year. And even with all of Disney’s cost-cutting and the rebounding ad market, the operating income of the conglomerate’s TV networks only rose 7% year-over-year.

Disney CEO Bob Iger has promised more cost-cutting going forward. But once the cuts end (and they will have to eventually), it’s clear that the profitability of the company’s conventional TV assets will resume sinking.

And since the company’s conventional TV assets still generate nearly a third of its revenue and over half of its operating income, the continued decline of its profitability will weigh tremendously on the conglomerate’s overall bottom line.

Another critical point to consider is that much of the increase in Disney’s bottom line last quarter stemmed from a massive increase in the profitability of its International Parks business. The latter business’ OI surged to $441 million in Q4 from just $74 million in Q4 of 2022.

The jump was likely spurred by the easing of Covid restrictions in China earlier this year. Of course, that year-over-year increase will eventually disappear. Further, China’s slowing economy will likely weigh on Shanghai Disney’s future results.

The Conglomerate’s Growth Strategy Probably Won’t Deliver

Disney is relying on its streaming channels to boost its bottom line eventually. However, those channels still generated a rather large operating loss of $387 million last quarter, so they’re still a long way from making a meaningful, positive contribution to its profits. Although the streaming unit’s operating loss sank by $1 billion last quarter versus Q4 of 2022, much of that large decline was likely due to cost-cutting and price increases, which can’t be repeated in the future.

CEO Bob Iger outlined several growth strategies for the company on the Q3 earnings call. These strategies include developing a direct-to-consumer business model for ESPN, accelerating the growth of the Parks business, and revitalizing the company’s movie studio.

Iger was vague on what he meant by launching a “direct-to-consumer” business around ESPN. One element of that plan could involve selling sports paraphernalia, such as clothes and sporting goods. But of course, there is a tremendous amount of competition in that space from many retailers, including department stores, sporting goods stores, and Amazon (NASDAQ:AMZN).

Iger also indicated that the firm could look to sell sports content on a pay-per-view basis. But I don’t think that would be a needle mover for the company, given the relatively limited demand for regional games and the fact that Disney would probably upset cable subscribers and cable companies if it tried to charge ESPN subscribers for watching very important games.

Regarding the “turbocharging” parks, I don’t expect that to work due to slowing economic growth in China, easing travel trends in the U.S., and lingering resentment towards Disney by many Americans towards the company for its political exploits in recent years.

Meanwhile, the structural decline of the movie theater business will make it difficult for the firm to revitalize its movie business.

The Bottom Line on DIS Stock

Disney has made its financial results look better but still hasn’t found a way to offset its conventional TV business’s slow, steady decline.

There’s one statistic that sums up how much the company has fallen. Specifically, one of its big ambitions is getting its cash from operations back to the same level as in 2018. That’s pretty dismal, considering that was five years ago, and we’ve had a large amount of inflation since then.

I continue to believe that DIS stock is significantly overvalued, given the huge obstacles it’s facing.

On the date of publication, Larry Ramer did not have (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

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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