Razvan
Razvan
Investors in the House of Mickey Mouse have done remarkably well, as The Walt Disney Company (NYSE:DIS) stock has outperformed the S&P 500 (SPX) (SPY) since my last article in early December 2023. While I lowered my rating to a Hold/Neutral, I also highlighted that investors should capitalize on potential dips to add more exposure.
Accordingly, DIS pulled back through its January 2024 lows and hasn't looked back. As a result, DIS has surged nearly 30% through last week's highs at the $115 level. Disney investors who suffered the post-pandemic meltdown but held on to their conviction likely felt vindicated. In addition, dip buyers who ignored DIS's peak pessimism in late 2023 and bought aggressively have been rewarded for their contrarian conviction.
Disney is a world-class company with global assets spanning Linear TV, streaming, consumer products, and theme parks. While it still needs to manage the secular decline attributed to its Linear TV assets, Disney has demonstrated its ability to rationalize costs while remaining on track for streaming segment profitability.
In addition, Disney management remains confident in its theme parks business, flexing its muscles to monetize its IP on its highly profitable parks and experiences assets. As a result, the company's solid performance for Disney's first fiscal quarter likely corroborated the market's confidence in its ongoing recovery.
At a recent conference, Disney CEO Bob Iger elucidated why Disney intends to close the gap on streaming leader Netflix's (NFLX) technological lead. As Disney moves closer to reaching sustainable profitability in its direct-to-consumer segment by the fourth fiscal quarter, it should bolster Disney's ability to invest. In addition, Disney has committed to meeting or exceeding its targeted $7.5B in annualized cost savings by the end of FY24, lifting its margins.
The recent joint venture with Fox (FOX) and Warner Bros. Discovery (WBD) to create a leading sports streaming platform showcases Disney's ability to expand its growth vectors and monetize its assets. While there are valid concerns about whether it could hurt Disney's existing portfolio given the pricing uncertainties, the market doesn't seem unduly concerned. In contrast, the market appears confident that the platform could extend the competitive edge of Disney and its peers. The negative response from fuboTV (FUBO) underscored the potentially imminent threat that could shake up the sports streaming market if regulators cleared it.
Analysts' estimates are highly favorable for Disney's capability to continue recovering its highly prized profitability. Seeking Alpha Quant rates DIS with an "A+" profitability grade, underscoring Disney's fundamentally strong moat.
Wall Street expects Disney to deliver a 4Y adjusted EPS CAGR of 14.3% from its FY22 base. DIS is valued at an FY26 adjusted EPS multiple of 18.3x, well below its 10Y average of 32.4x. Therefore, I assessed that the market remains relatively pessimistic over Disney's long-term prospects, possibly baking in execution risks relating to its DTC transformation amid a secular decline in Disney's Linear TV business. In other words, investors confident of a further recovery in Disney's ability to leverage the growth vectors enunciated earlier should consider capitalizing.
DIS price chart (monthly, long-term, adjusted for dividends) (TradingView)
As seen above, DIS's price action suggests its long-term bottom in October 2023 at the $80 level has remained robust. I gleaned selling pressure this month as DIS buyers attempted to clear the $115 level.
I'm not surprised that we could see downside volatility, as some dip buyers could have leveraged the recent outperformance to take profits and reallocate. However, DIS remains well below its pandemic highs, and its valuation has not been assessed as aggressive.
With Disney tracking confidently toward DTC profitability by CY2025, it should further improve DIS's buying sentiments. Long-term investments in its theme parks should also enhance Disney's ability to mitigate the structurally weaker Linear TV assets, as it likely affected the market's perception of their valuation. However, investors must remember that Disney possesses a range of world-class assets at its disposal, allowing it to creatively unlock near- and long-term opportunities to mitigate the secular decline.
As I expect DIS to retake the $115 level after the anticipated consolidation decisively, I'm ready to upgrade my rating to reflect my bullish sentiments.
Rating: Upgrade to Buy.
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