I am neutral on the Walt Disney Co. (NYSE:) because its competitive advantages, and solid growth runway, make its otherwise lofty valuation multiples look reasonable.
Disney is a leading global entertainment and media business that owns some of the most valuable franchises in the world. They include Marvel Studios, Lucasfilm Ltd., Pixar Animation Studios Inc., ESPN, ABC TV Network, and Disneyland Park Theme Parks & Resorts. (See DIS stock charts on TipRanks)
Disney’s third fiscal quarter was strong, led by 12.4 million new subscriptions to Disney+, bringing the company’s total streaming network size to an impressive 116 million members.
Company-wide revenue increased by a 45% year-over-year, thanks to a sharp rebound in Disney Parks, Experiences, and Products revenue from a COVID-19-suppressed $1.1 billion in 2020, to $4.3 billion this year. The Disney Media and Entertainment business grew by 18% year-over-year.
Diluted earnings per share also improved immensely year-over-year, due to the company’s significant operating leverage. In last year’s fiscal third quarter, the company ran a loss of $2.61, but saw that jump to a profit of $0.50 per diluted share in 2021’s third quarter.
While the resurgence of COVID-19 cases through the Delta variant continues to weigh on the company’s near-term outlook, it appears that the worst is likely behind it, and the medium- to long-term growth runway remains robust.
Disney stock is certainly not cheap right now, but is not too expensive either, given the competitive advantages and strong long-term growth runway.
Price to forward normalized earnings is 41.6x, and the price to forward free cash flow is 75.6x. Revenue is expected to surge by 25.4% in 2022.
Wall Street’s Take
From Wall Street analysts, DIS earns a Strong Buy analyst consensus, based on 15 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average DIS price target of $214.47 puts the upside potential at 16%.
Summary and Conclusions
Disney enjoys a strong competitive advantage that rests on its massive and fiercely loyal customer base, and strong household name brands.
With the growth of its online streaming platform Disney+, the company now has a new way to leverage and profit from its wildly popular film franchises at little incremental cost.
Additionally, its world-famous theme parks are seeing a strong recovery from COVID-19 headwinds, which should combine with Disney+ growth to drive strong top- and bottom-line improvements for the foreseeable future.
While the stock is not cheap at present, it is also not particularly expensive. Furthermore, Wall Street analysts are overwhelmingly bullish on the stock.
As a result, while investors might want to wait for a pullback before purchasing shares, the stock is likely not a long-term underperformer from current prices.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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