Why Disney’s (DIS) Stock is Super Cheap

Since retaking the reins as the CEO of The Walt Disney Company (DIS) in late 2022, Bob Iger has faced one challenge after another.

His predecessor wore out top-tier franchises while losing money on streaming every quarter.

Yet, Iger managed to turn things around, settling contracts with cable companies, narrowing the plan for entertainment, and as of the latest quarter, getting streaming to profitability.

Even Nelson Pelz’s activist calls were silenced by Iger’s performance.

However, the latest quarterly report showed signs of weakness in the once invulnerable theme parks, where attendance began to slip as consumers curtailed spending.

Shares have been on a wild ride, running from $80 to over $120 to start 2024, only to slide back down to $90.

We were big fans of the company back in late 2023, right before the stock took off.

Do we think shares of Disney can pull another rabbit out of their hats?

Disney’s Business

Mickey Mouse’s empire rakes in billions, but Disney’s real magic lies beyond its iconic rodent. 

This entertainment juggernaut has its white-gloved hands in everything from bustling theme parks to binge-worthy streaming services, serving up a potent cocktail of nostalgia and cutting-edge content to audiences worldwide.

Disney’s entertainment arsenal packs a punch across multiple fronts. Its movie studios churn out blockbusters, while its TV networks and streaming platforms keep eyeballs glued to screens 24/7. 

Meanwhile, theme park visitors shell out big bucks to rub elbows with princesses and superheroes while parents scoop up Disney-branded merch for their kids.

The House of Mouse divides its kingdom into three magical realms:

• Entertainment (45% of the treasure chest) – Where linear TV networks battle streaming services for your attention, and content licensing keeps the gold flowing.
• Sports (20% of the spoils) – ESPN’s empire of sweat and glory, plus Star India’s cricket bonanza.
• Experiences (35% of the loot) – Theme parks that empty wallets, a cruise line for seafaring Mouseketeers, and branded merch galore.

Source: Disney Q3 2024 Investor Presentation

Disney’s latest quarterly report reads like a fairy tale: revenue jumped 4% to an eye-popping $23.2 billion, with the Entertainment division playing hero. 

The real Cinderella story? Disney’s streaming services finally turned a profit.

Despite forecasting lower park attendance, Disney plans to spend $8 billion on its Florida parks in the next ten years, with another $9 billion in the following decade.

Financials

Source: Stock Analysis

Entertainment helped keep Disney moving in 2020 when COVID shut down its experiences.

In the following years, consumer travel exploded, allowing management to charge higher prices for sold-out parks.

Margins improved as well, though you can see the impact of streaming starting in 2019. That’s also when the company added nearly $27 billion in debt to fund the venture.

Total debt maxed at $62.3 billion in 2020 and has since fallen to $47.6 billion, roughly where it was in 2019.

Operating cash flow hit $13.2 billion in the last twelve months, its first time over $10 billion since 2018.

This speaks to the enormous turnaround Iger instituted.

Valuation

Source: Seeking Alpha

On a P/E basis, Disney isn’t particularly cheap. It’s the second most expensive of the group behind Netflix (NFLX).

However, the stock is quite a value on a price-to-cash flow basis. At 12.3x trailing-12-month cash flow, the stock is 67% cheaper than its 5-year average.

But, it’s worth noting analysts expect operating cash flow to decline to $10.9 billion this year.

Growth

Source: Seeking Alpha

On the growth side, Disney expects to improve 4.8% YoY on sales, well below Netflix and even Live Nation Entertainment (LYV) but well ahead of Comcast (CMCSA) and Charter Communications (CHTR).

What’s really impressive is the multi-year growth in EBITDA and EBIT as well as EPS over the last several years, again highlighting the impact of Iger.

Profitability

Source: Seeking Alpha

Margins are hard to compare across these peers as each runs a vastly different business.

However, it’s worth pointing out that Disney’s free cash flow margin sits at 9.2% and has grown an average of 10.2% annually over the past five years.

Our Opinion 10/10

We see any short-term pains brought about by a recession as opportunities to get a better entry price.

Iger has made enormous strides at the company, including making streaming profitable. The long-term outlook for the company is bright so long as he’s at the helm.

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