The Walt Disney Co: -15.1%
Usually, companies that miss earnings estimates in volatile market conditions would see adverse near-term movements in their share price. This was what happened to The Walt Disney Co, which also explained its underperformance of losing 15.1% against the benchmarks Nasdaq and S&P 500 which gained 20.6% and 10.5% respectively. Disney currently trades at US$91.32 ($122.53) and we think this stock is undervalued. The intrinsic value of the company based on our updated in-house valuations is roughly 35% above its current price.
To recap, Disney is a diversified worldwide entertainment company. It operates two main segments, the first being Disney Media and Entertainment Distribution (DMED) which covers linear networks, cable channels and direct-to-consumer streaming services. The second segment is Disney Parks, Experiences and Products (DPEP) which consists of theme parks and resorts and consumer products such as branded merchandise through retail, online and wholesale businesses.
Disney has been investing heavily in the direct-to-consumer (DTC) streaming segment, which has yet to turn profitable. The DTC segment, which covers services such as Disney+, Hulu and ESPN+, did not perform as well as expected in the most recent 2QFY2023 ended June financial period. Although operating losses were cut by 26% for the quarter y-o-y, other business fundamental indicators such as the number of paid subscribers for Disney+ fell by 2%. Disney’s plan of turning the DTC segment profitable by the end of the next financial year is a much harder task, although continued investment in this segment could potentially result in savings or even profitability through initiatives such as newer ad tiers. Disney is also expected to have Hulu content on Disney+, to increase the price of ad-free streaming which should aid in its efforts of turning the DTC segment profitable. The management has reiterated their focus on the bottom line of the streaming segment and multiple initiatives are being carried out to see it through, which is a sign of a good quality business.
Meanwhile, the DPEP segment, which has traditionally been the more profitable segment as it commands higher margins, is expected to significantly improve and boost the company’s profits for the financial year. Pent-up demand and economic recovery are strong tailwinds for this segment and for the most recent financial period, DPEP’s operating income was up 23%. Specifically, the parks and experience sub-segment was the largest contributor to this, with domestic operations increasing by 10% and international operations turning positive from losses in the previous comparable financial period. Despite management focusing on other segments, the profitability of the DPEP segment should keep Disney strongly profitable and more than offset the DMED segment’s operating losses over the next few periods.
In terms of financials, Disney’s most recent quarter was good, with operating cash flow increasing 83% y-o-y and free cash flow almost tripling over the same period. Disney has a current ratio of 1.0 times, reflecting adequate liquidity, while its solvency is also adequate with a debt-to-equity ratio of 0.55 times and an interest coverage ratio of 4.2 times.
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The company has 29 “buy” calls, nine “hold” calls, and no “sell” calls, with a consensus target price of 35% above its current trading price.
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Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
