Thoughts on Disney and my visit to Hollywood Studios
I want to update my thoughts on entertainment giant Disney (DIS), which I first wrote about in my e-mail last July 17:
Shares of entertainment giant Disney have been more than cut in half since reaching an all-time high around $200 in March 2021. Today, below $90, they're at levels first reached nine years ago.
I love buying great companies when their stocks have been pummeled, so I took a quick look...
There's no question that Disney is an insanely great company – operating beloved amusement parks, ABC and ESPN networks, movie studios Walt Disney Pictures, 20th Century Studios, Marvel, Lucasfilm, Pixar, and Searchlight Pictures, and much more. Here's a video compilation of all the praise Warren Buffett and Charlie Munger have heaped on the company over the years.
But Disney is facing all sorts of headwinds under the leadership of CEO Bob Iger. He was CEO from 2005 to 2020, turned over the reins to his handpicked successor, Bob Chapek, and then as the stock crated, engineered Chapek's ouster and reassumed control.
After being one of the best growth stocks of all time, it's now back to where it was 10 years ago:
In my November 9 e-mail, after the company reported fourth-quarter earnings, I added:
If there's one thing that gets my value-investing heart beating fast, it's a chart like that for one of the world's greatest companies.
And despite its recent woes, Disney is a great company.
I can remember clearly the few times my parents took me to Disneyland and Disney World in the 1970s, the many times I took my daughters there – believe it or not, I loved riding on "It's a Small World" eight times in a row with them – and I can't wait to take my grandchildren there.
My college buddy Bill Ackman and I did a couple of dads-and-daughters trips to Orlando (at the time, we each had three daughters... he now has a fourth). Here's a picture I took of Bill with our two oldest ones (who are now in their late 20s):
Even though the rides were newer and more technologically advanced at Universal Studios, our kids preferred the Disney parks because of the characters like Goofy and the princesses.
I'm not sure any amount of money could dislodge Disney's characters/brands...
To refresh my memory, after the ICR conference ended on Tuesday, I drove to Disney's Hollywood Studios and spent four hours at all of the major attractions. (Admission was $158.) Here I am at the entrance:
Here's a picture outside the highly acclaimed Star Wars: Rise of the Resistance ride:
Here's inside:
I also saw the Beauty and the Beast live show:
And the Indiana Jones stunt show:
A few observations...
Honestly, I wasn't blown away by the rides – even the highly acclaimed Star Wars one. I wish I had gone to Disney's Animal Kingdom Theme Park for its incomparable safari drive, fun roller coasters, and river rafting ride.
But it didn't matter. Even on a cloudy Tuesday in January (with thunderstorms in the forecast, which fortunately held off until near the end of my visit), the park was surprisingly crowded. It was a 45-minute wait for Star Wars and 85 minutes for the Tower of Terror. Here's the busy main street:
And families were lining up to take pictures with the Disney characters:
Turning to the stock...
The company currently has a market cap of $165 billion with $37 billion of net debt, giving it an enterprise value ("EV") of around $200 billion. The stock trades at 2.4 times trailing revenue, 12.8 times EV to earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and 23.8 times adjusted earnings per share ("EPS") over the past year.
Analysts project that EPS will rise 15% from $3.76 to $4.34 in fiscal year 2024 (ending in September), so the stock is trading at 20.6 times forward estimates.
Revenue and operating income grew steadily for 15 years, but then disconnected after the pandemic. Revenue has recovered to hit all-time highs, while operating income has barely recovered half its decline:
It's hardly surprising that with profits back to levels of a decade ago, the stock is as well...
The cash-flow statement tells a similar story. Interestingly, operating cash flow plunged the year before the pandemic (likely related to the $71 billion acquisition of media conglomerate 21st Century Fox). It stayed depressed through 2022 but recovered strongly in 2023:
Disney paid for 21st Century Fox mostly in stock, reflected in the increase in the diluted share count:
It also used $10 billion in cash, reflected in the jump in the company's net debt, which currently stands at $37 billion, equal to 3.2 times trailing EBITDA:
To pay down its debt load, Disney has (wisely) suspended share repurchases and its dividend the last three years:
So where does the stock go from here? That is, of course, a function of two things: EPS and the multiple. If earnings are strong, I could see the multiple expanding a bit to, say, 25 to 30 times EPS. But I think most of the return investors will earn will come from earnings growth...
Very simply, if earnings grow 15% over the next year and the multiple remains constant, the stock will also rise 15% – a decent return.
Where things really get exciting is, with revenues twice what they were 10 years ago, earnings also revert to twice what they were. In that case, the stock is likely to double.
With longtime CEO Bob Iger back at the helm, activist Nelson Peltz rattling the bars of the cage, rationalization coming to the video-streaming industry, and Disney's fabulous parks business continuing to crank out cash, I think there's a good chance of an excellent outcome here.
My colleague John Engel, who writes the excellent Stansberry Innovations Report, shares this bullish standpoint. He recommended shares to his subscribers back in October and they're already up 8%.
If my team and I decide to pull the trigger, Stansberry's Investment Advisory subscribers will be the first to know...
Best regards,
Whitney
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