Disney Dominates With Room to Grow

Financial pros went gaga over Disney’s latest earnings report.

CEO Bob Iger shut down critics by delivering a huge earnings beat as losses on streaming services halved.

And it couldn’t come a moment too soon.

Plagued by dwindling box office sales and activist calls for change, Disney was in dire straights.

But according to our TrackStar data, financial pros continued searching for Disney’s stock and earnings call related content.

They wanted to see just how far Disney could go. 

After all, the stock was over $200 back in 2021.

And there’s a good chance it might get there again.

Disney’s Business

Born in California, raised in Florida, Disney is an entertainment giant circling the globe.

From theme parks to Marvel movies, its brand is synonymous with success.

The business breaks down into three main segments:

• Entertainment (45% of total revenues) – Encompasses the production and distribution of film, television, and streaming content across various platforms.
• Parks, Experiences and Products (35% of total revenues) – Includes its theme parks, resorts, cruise lines, and merchandise.
• Media Networks (20% of total revenues) – Comprises broadcast and cable television networks, television production operations, television distribution, domestic television stations, and radio networks.

Disney’s recent troubles began under the previous CEO Bob Cheepak.

Streaming services burned cash while iconic brands from Star Wars to Marvel lost their luster.

The pandemic didn’t help theme park attendance any.

Bob Iger, Disney’s former CEO, was brought in to right the ship.

He immediately took action, putting the company on track to cut costs by $2 billion.

The latest quarter showed progress towards these goals, while Iger introduced new ways to approach entertainment.

Disney inked a collaborative deal with Fox to create a premium sports network as well as a planned ESPN standalone service.

It took at large stake in Epic Games, the makers of Fortnight.

And the company promised to create more standalone movies rather than beating franchises to death.

Source: Disney Q1 2024 Earnings Presentation

Everything culminated into a huge earnings beat, even if revenues weren’t all that spectacular.  

Financials

Source: Stock Analysis

Disney’s financials look a bit odd with revenues climbing while gross margins collapsed.

But when you realize the company began its streaming in 2018-2019, it makes sense.

Streaming has been a perpetual loser, even if it grew revenues.

The good news is Disney has stabalized its profitability.

Operating cash flow was over $14.3 billion in 2018. In 2019, it shrank to $6.6 billion. Today, it’s back up to just over $13.0 billion with Capex only slightly higher at $5.1 billion.

Notably, Disney cut its dividend and share buybacks in 2021 to conserve capital, only recently reinstituting it.

Valuation

Source: Seeking Alpha

Traditionally, Disney garnered a premium valuation. That’s still somewhat true, but with caveats.

Companies like Comcast (CMCSA) and Charter Communications (CHTR)  have larger legacy cable businesses rapidly shrinking.

Netflix (NFLX) is closer to Disney in terms of streaming, but command an even higher premium.

At 15.6x cash and 28.9x forward earnings, Disney isn’t expensive, especially if you believe in the turnaround.

Growth

Source: Seeking Alpha

Disney’s revenue growth has been lackluster. But as the free-cash-flow growth shows it has done phenomenal improving its operations.

The same is evident when looking at its EBIT 3-year CAGR. No other company comes close to these numbers.

Profitability

Source: Seeking Alpha

While Disney’s gross margins are towards the bottom of the pack, they’re improving, and we expect to keep getting better.

Ideally, this should boost the company’s EBIT margin by as much as 50%-100% by 2025-2026.

Our Opinion 9/10

We’re still big fans of the house of mouse and see a lot more room for the stock to climb.

Iger’s instituted an effective turnaround on a massive company. 

His leadership is crucial to the company’s success.

While the stock may need a breather, we feel it could easily gain another 50% over the next tear or two.