Is the House of the Mouse Worth a Disney Dollar?

One-trick pony stocks have gotten battered in 2022. Netflix (NFLX) is down 70%, Shopify (SHOP) is down 75%, and Lemonade (LMND) is down 55%.

And while a lot of stocks are down significantly, it’s the companies that can draw from multiple revenue streams, the ones most likely to overcome the bear market. 

One of the more interesting ones is Disney (DIS). 

The house of the mouse caused quite a stir recently, wading into politics at a tumultuous time.

Searches for Disney’s stock have sat at record levels amongst financial pros according to our data, with some days exceeding several hundred pageviews.

And it’s no surprise why.

Florida lawmakers bit back at Disney after the company denounced recent legislation it said were at odds with its values.

Set to dissolve in 2023, the Improvement District set up back in the 60’s allows Disney to act as its own government, collecting taxes, providing services, building codes, etc.

Removing that specialty status sets Disney on a collision course with the two counties in Florida in which it resides.

Estimates currently put the impact north of $8 billion to Disney’s bottom line, and places $2 billion in bonds on the two counties.

Time will tell how this plays out, but it’s led to huge interest in where Disney goes from here.

The question is whether the company is of decent value here.

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The Walt Disney Company (DIS) Business

DIS together with its subsidiaries and affiliates is a leading diversified international family entertainment and media enterprise that includes Disney Parks, Experiences and Products; Disney Media & Entertainment Distribution; and four content groups—Studios, General Entertainment, Sports, and International — focused on developing and producing content for DTC, theatrical and linear platforms. 

Its Parks, Experiences and Products segment includes Disneyland Resort, Walt Disney World, Disney Publishing Worldwide, Disney Cruise Line, and the Disney Store to name a few. 

The brands included in Disney Media and Entertainment Distribution include Disney+, ESPN+, Hulu, hotstar, and Disney Music Group. 

DIS breaks down its Media and Entertainment Distribution revenue numbers even further:

DIS direct to consumer numbers include its streaming services:

While most of the business is steady, its direct-to-consumers revenue numbers shot up in the first quarter by 34% to $4.7 billion. 

In addition, content sales/licensing and other revenues for Q1 increased 43% to $2.4B. Its content sales/licensing and other revenues segment include Marvel Studios, The Walt Disney Studios, Walt Disney Animation Studios, Pixar Animation Studios, Disney Theatrical Group, 20th Century Studios, and Searchlight Pictures. 

The general content group includes ABC Entertainment, ABC News, 20th Television, FX, Hulu, and National Geographic. ESPN is in its own category group labeled sports content. 

Financials

DIS increased its revenues in 2021 to $67.4 billion, just shy of its 2019 record of $69.57 billion. 

Its net income went positive in 2021 after being negative $2.8 billion in 2020 due to the COVID-19 outbreak as theme parks reopened and patrons returned.

One knock on DIS is that its gross margins have been declining over the years. For example, in 2019, the firm’s best year revenue-wise, its gross margin was 39.6%, and last year it was 33.1%.

Disney hopes that its streaming services will help improve this over the next several years.

In 2021 the firm had a positive free cash flow of $1.98 billion or $0.77 per share. That’s down from $6.48 a share in 2018 and largely driven by lower margins. 

DIS has a current ratio of 1.08x. Its highly liquid assets are 1.08x greater than its short-term liabilities. 

It has a quick ratio of 0.94x, meaning its highly liquid assets are 0.94X greater than its short-term liabilities. 

The company has a debt-to-equity ratio of 0.58x, which is an incredible figure given how large the company is, and the number of revenues it brings in. 

The capital structure for DIS is as follows: total debt of $54 billion and cash upwards of $14 billion, and a market cap of approximately $200B

Valuation

DIS has a price-to-sales ratio of 2.32X, which is above the sector median of 1.34X

However, the P/E Non-GAAP ratio stands at a lofty 35.28,x which is significantly higher than the sector median of 13.83x. 

And the price to cash flow ratio is a whopping 37.12x.

Considering Disney grows revenues in the single digits, this would be tough to overcome.

Our Opinion – 6/10

Disney is a great company. But the margin compression puts this stock in the cautionary camp.

There is value. But management needs to unlock it first.

The company has excellent pricing power at the moment. But whether they can cut costs remains to be seen.