3 High ROE Stocks to Bet on as Markets Surge on Economic Strength

Disney shares have risen over 18% in the last month, and much of that rally has come after the company released its fiscal Q4 2024 earnings earlier this month. The company not only posted better-than-expected earnings for the quarter, but also provided upbeat guidance for the next couple of years.

Despite the recent rally, Disney still trades below its 2024 highs. In this article, we’ll discuss whether DIS stock is still a buy, and whether the stock can rally further into 2025 - beginning with a snapshot of its recent earnings.

Walt Disney Co is ramping up its efforts to capture a larger share of the Asian streaming market by investing in original Japanese anime and expanding its Korean superhero franchise.

The company’s strategic pivot aims to focus on quality over quantity in key Asian markets, contrasts with Netflix Inc’s aggressive strategy of high-volume, locally tailored content.

Prior reports indicated Netflix ramping up original programming in Southeast Asia, focusing on Thailand, Indonesia, and the Philippines to tap into young demographics.

Also Read: Comcast’s Spin-Off to Boost Broadband and Streaming Growth: Goldman Sachs

Valued at a market cap of almost $22 billion, Leidos Holdings, Inc. provides services and solutions in the defense, intelligence, civil, and health markets. The Reston, Virginia-based company’s core capabilities include providing solutions in the fields of cybersecurity, data analytics, enterprise IT modernization, operations and logistics, software development, and systems engineering.

Shares of this national security and health company have significantly outperformed the broader market over the past 52 weeks. LDOS has rallied nearly 55.9% over this time frame, while the broader S&P 500 Index ($SPX) has gained 31.1%. Moreover, the stock is up 52.2% in 2024, compared to SPX’s 24.7% gain on a YTD basis.

Zooming in further, LDOS’ outperformance becomes more evident when compared to the Technology Select Sector SPDR Fund’s 26.9% gain over the past 52 weeks and 21.3% return on a YTD basis.

The Zacks Media Conglomerates industry is flourishing, driven by the consumer shift toward over-the-top (OTT) content. Major players like Disney DIS, Reservoir Media RSVR and Paramount Global PARA are aggressively investing in developing original music, shows and fresh content to captivate and retain Gen Z and millennial subscribers. Moreover, the industry's prospects are bolstered by the availability of cost-effective alternative packages, such as skinny bundles, designed to entice consumers with lower prices compared to traditional offerings. Conversely, the industry grapples with waning broadcast television ratings and diminishing demand for home entertainment sales of theatrical content. Furthermore, advertisers' tepid spending amid rampant inflation and elevated interest rates pose a formidable concern for industry players.

Industry Description

The Zacks Media Conglomerates industry encompasses companies engaged in creating and distributing various content forms, from entertainment to educational materials. These firms also offer travel and consumer products. The industry is adapting to the shift toward OTT content, both subscription-based and ad-supported. Advertising remains a key revenue source, while the metaverse presents new opportunities. Subscription price increases, driven by growing subscriber numbers, offer potential revenue growth. However, the industry faces challenges that include declining broadcast TV ratings, reduced demand for home entertainment versions of theatrical releases, and increasing cord-cutting trends. Despite these obstacles, media conglomerates continue to evolve, leveraging new technologies and consumer preferences to maintain their market position.

3 Trends Shaping the Future of the Media Industry

Original Content Driving Growth: Media companies' capacity to generate advertising revenues beyond traditional TV platforms, such as websites and other digitally consumed channels, unlocks increased opportunities for targeted advertising. The growing consumer preference for subscription services over linear pay-TV and rental or outright purchases has compelled industry players to adapt their business models. Media companies are innovating with original content to attract and retain subscribers.

High-Speed Internet Demand Acting as a Key Catalyst: The burgeoning demand for high-speed Internet, including broadband, has benefited media industry participants. Improving Internet speed has fueled the demand for high-quality videos and the trend of binge-watching. Furthermore, a strengthening broadband ecosystem in international markets, coupled with the proliferation of smart TVs, is expected to drive growth.

Cord-Cutting and Matured PayTV Industry Hurting Prospects: The media television industry is undergoing a rapid evolution of distribution platforms, embracing new players and advanced technologies. The declining profitability of residential video services due to rising programming costs and retransmission fees has made survival challenging for traditional companies. Additionally, the heightened demand for on-demand content has led to the mushrooming of streaming service providers, making it increasingly difficult for traditional media television companies to maintain their viewer base.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Media Conglomerates industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #72, which places it in the top 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since Nov. 30, 2023, the industry’s earnings estimates for 2024 have moved north by 11.9%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms the Sector, Lags the S&P 500

The Zacks Media Conglomerates industry has underperformed the broader Zacks Consumer Discretionary sector and the S&P 500 composite over the past year.

The industry has returned 15.4% in the abovementioned period compared with the broader sector’s growth of 18%. The S&P 500 has risen 30% during the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month P/S, a commonly used multiple for valuing media companies, we see that the industry is currently trading at 1.13X compared with the S&P 500’s 5.66X and the sector’s 2.28X.

Over the past three years, the industry has traded as high as 1.85X and as low as 0.86X, with a median of 1.09X, as the charts below show.

Trailing 12-Month Price-to-Sales (P/S) Ratio

3 Media Stocks to Watch

Disney: This Zacks Rank #2 (Buy) company’s assets include movies, television shows and theme parks. Disney is benefiting from a solid revival in its international theme park and resort businesses. Recent attractions like the Frozen theme land at Hong Kong Disneyland and Walt Disney Park in Paris, as well as the Zootopia theme land at Shanghai Disney, are expected to boost the prospects of the theme park business. Disney’s iconic California theme park is poised for a magical transformation with significant investment amounting to at least $1.9 billion over the next decade. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Disney’s focus on sports streaming, particularly Live Sports on ESPN+, is expected to attract more subscribers. The renewal of the MLB sports rights deal through 2028 and the agreement with Spanish club football’s first division, La Liga, further strengthened the portfolio of the company’s sports content.

Strong international growth, particularly in Asia, promises to unlock new revenue streams. The company's robust guidance through 2027, strategic ESPN integration, and $3 billion share buyback demonstrate management's confidence.

The Zacks Consensus Estimate for the company’s fiscal 2025 earnings has moved north by 5.3% to $5.38 per share over the past 30 days. DIS shares have risen 20.7% year to date.

Price and Consensus: DIS

Reservoir Media: This Zacks Rank #3 (Hold) company shines as a compelling player in the music rights industry, boasting a premium catalog of more than 140,000 copyrights across multiple genres. The company's strategic acquisitions of iconic catalogs, coupled with streaming's explosive growth, positions it perfectly for sustained revenue expansion. Its diversified portfolio, including works from artists like Sheryl Crow and Alabama, provides stable and recurring cash flows. Management's proven track record of accretive acquisitions and value-enhancing catalog management drives consistent growth. The rising adoption of music in social media, gaming and new technologies creates additional monetization opportunities.

The company has announced plans to raise up to $100 million through an offering of various securities. The move signals Reservoir’s ambition to fuel further growth through acquisitions while reducing its debt. In addition to acquisitions, Reservoir also plans to use a portion of the proceeds to reduce its debt burden, potentially improving its financial flexibility and creditworthiness.

The Zacks Consensus Estimate for the company’s fiscal 2025 earnings has moved south by 22.25 to 7 cents per share over the past 30 days. RSVR shares have risen 49.1% year to date.

Price and Consensus: RSVR

Paramount Global: This Zacks Rank #3 company stands as an undervalued entertainment powerhouse, boasting an exceptional content library and growing streaming presence through Paramount+. The company's diverse revenue streams — including the CBS broadcast network, popular cable channels like Nickelodeon and a valuable film studio — provide strong cash flow generation.

Paramount+ is gaining impressive momentum, leveraging must-watch sports content, hit shows and blockbuster movies to drive subscriber growth. The company's strategic focus on premium content creation and international expansion presents significant upside potential. The integration of Showtime with Paramount+ will further drive the subscriber base. Partnerships with Walmart and Verizon bode well for Paramount+.

The Zacks Consensus Estimate for the company’s 2024 earnings has moved north by 22.4% to $1.86 per share over the past 30 days. PARA shares have lost 21.6% year to date.

Price and Consensus: PARA