The entertainment industry has been under pressure due to macroeconomic headwinds. Moreover, the industry is struggling amid the ad recession, which is marring growth. However, the industry’s long-term prospects look bright as it is evolving with new technologies. While we think fundamentally strong entertainment stock AMC Networks (AMCX) might be worth buying, Walt Disney (DIS) and Warner Bros. (WBD) could be best avoided now. Read on.
The entertainment industry is evolving with changing consumer behavior. While the industry is suffering due to the macro headwinds, technological advancements and growing demand for digital entertainment are likely to bolster the sector’s growth. OTT (over-the-top) media services have emerged as one of the biggest disruptors in the industry.
The Global Entertainment and Media market is expected to expand at a CAGR of 6.3% to reach $3.36 trillion by 2027.
However, according to Fitch Ratings, legacy mediums will be increasingly hyper cyclical and continue losing share to digital platforms. Moreover, audience fragmentation is expected to continue as alternative platforms cannibalize viewers, creating a new set of risks and opportunities across the media and entertainment landscape.
In addition, the ad recession is causing margin and leverage pressures for the companies. Moreover, overall ad weakness is expected be exacerbated this year by the loss of historic levels of political advertising.
While we think fundamentally strong entertainment stock AMC Networks Inc. (AMCX) might be worth buying, The Walt Disney Company (DIS) and Warner Bros. Discovery, Inc. (WBD) could be best avoided considering their fundamental weakness.
Stock to Buy:
AMC Networks Inc. (AMCX)
AMCX owns and operates a suite of video entertainment products that are delivered to audiences and a platform to distributors and advertisers in the United States and internationally. The company operates in two segments, Domestic Operations and International and Other.
AMCX’s forward EV/Sales of 1.08x is 47.1% lower than the industry average of 2.05x. Its forward non-GAAP P/E multiple of 2.41 is 85.4% lower than the industry average of 16.58.
AMCX’s operating revenues increased 12.3% year-over-year to $478.56 million during the nine months ended September 30, 2022. Net income attributable to AMCX’s shareholders increased 16.6% year-over-year to $272.28 million, while net income per share attributable to AMCX’s shareholders rose 15.6% year-over-year to $6.23.
Analysts expect AMCX’s revenue for the fiscal fourth quarter that ended December 2022 to come in at $937.07 million, indicating a 16.6% year-over-year growth. The company’s EPS is expected to increase 134.4% year-over-year to $1.27.
The stock has gained 4.7% over the past month to close the last trading session at $18.40.
AMCX’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AMCX also has an A grade for Value and a B for Quality. It is ranked first out of 16 stocks in the Entertainment – Media Producers industry.
To access additional ratings for AMCX’s Stability, Sentiment, Growth, and Momentum, click here.
Stocks to Sell:
The Walt Disney Company (DIS)
DIS is the well-known purveyor of family entertainment in the 20th and 21st centuries. It also was one of the world’s largest media conglomerates, with notable holdings such as Marvel Entertainment and 20th Century Fox.
DIS’ forward EV/Sales of 2.76x is 34.8% higher than the industry average of 2.05x. Its forward non-GAAP P/E multiple of 25.56 is 54.2% higher than the industry average of 16.58.
DIS’ linear network revenue declined 5.4% year-over-year to $7.30 billion for the first quarter that ended December 31, 2022. The company’s total segment operating income declined 6.6% year-over-year to $3.04 million. Its EPS excluding certain items, fell 6.6% year-over-year to $0.99 from its previous-year quarter.
Street expects DIS’ EPS to decline 7.3% year-over-year to $1.00 for the current quarter ending March 2023. Its revenue is expected to come in at $21.80 billion for the same quarter.
The stock has declined 28.6% over the past year to close its last trading session at $107.66.
DIS’ POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.
DIS also has a D grade in Value, Momentum, and Quality. It is ranked #12 in the same industry.
Beyond the POWR Rating grades we’ve stated above, DIS’ rating for Growth, Stability, and Sentiment can be seen here.
Warner Bros. Discovery, Inc. (WBD)
WBD provides content across various distribution platforms in approximately 50 languages worldwide. It also produces, develops, and distributes feature films, television, gaming, and other content in various physical and digital formats through basic networks, direct-to-consumer or theatrical, TV content, and games licensing.
WBD’s forward EV/EBITDA of 9.68x is 10.1% higher than the industry average of 8.79x. Its forward EV/Sales multiple of 2.04 is 2.4% higher than the industry average of 1.99.
During the fiscal third quarter that ended September 30, 2022, WBD’s total revenue stood at $9.82 billion. Adjusted EBITDA declined 9.1% year-over-year to $2.42 billion on a pro forma combined basis, while net income per share allocated to WBD’s series A common shareholders declined 495.8% year-over-year to a negative $0.95 for the same quarter.
WBD’s EPS is expected to come in at a negative $0.24 in the fourth quarter that ended December 2022, while its revenue is expected to be $11.23 billion.
The stock has plunged 49.9% over the past year to close the last trading session at $14.73.
WBD has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
It also has a D grade for Stability, Quality, Growth, Momentum, and Sentiment. It is ranked last in the same industry.
Click here to see the POWR Ratings of WBD for Value.
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AMCX shares were unchanged in premarket trading Wednesday. Year-to-date, AMCX has gained 17.42%, versus a 7.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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