2023-11-14 10:00:00 ET
Summary
- DIS may face more pain in the near term, as rumors suggest a potential sale of its profitable linear network business as a way to fund the unprofitable Hulu acquisition.
- The restart of its content productions from December 2023 may also trigger expanded expenditures, delaying its eventual FY2024 cost savings.
- Depending on the DIS management's choice of fund-raising for Hulu, be it through debt, share dilution, and/ or cash, we believe that its near-term prospects are uncertain.
- Iger continues to push for a potential reinstatement of dividends before the end of the calendar year as well, with any announcement likely to be disappointing.
- As a result of the mixed prospects, it is immediately apparent that the DIS stock is only suitable for growth-oriented investors looking for undervalued contrarian plays.
We previously covered Walt Disney Company ( DIS ) in August 2023, discussing its intensified streaming monetization efforts, likely taking a leaf out of NFLX's playbook with paid sharing from 2024 onwards.
This was on top of the raised D2C subscription prices from October 2023 and entry into sports betting, likely to bring forth improved top and bottom lines, resulting in our Buy rating then.
In this article, we will be discussing DIS's mixed prospects as the restart of content productions from December 2023 may trigger expanded expenditures, delaying its eventual cost savings. This is on top of the potential divestiture of its highly profitable linear networks, as a way to finance the Hulu acquisition.
Given its mixed near-term prospects, the stock is only suitable for contrarian investors who are looking to buy and hold for the long term. We shall discuss further.
DIS' Near-Term Prospects Appear To Be Uncertain
For now, DIS has recorded a bottom-line beat in its FQ4'23 earnings call, with revenues of $21.24B (-4.8% QoQ/+5.4% YoY) and adj EPS of $0.82 (-21.1% QoQ/+173.3% YoY).
DIS Cost Optimizations
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DIS' profitability tailwind in the latest quarter is partly attributed to the management's aggressive cost optimizations at an annualized sum of $7.5B , compared to the original guidance of $5.5B.
However, we believe that eagle-eyed investors may note that most of the cost savings is attributed to the reduced content spend of $1.5B, thanks to the previous SAG-AFTRA/WGA strikes.
With both strikes already concluding , we believe that DIS is unlikely to sustain this one-time cost saving, attributed to the restart of content productions from 2024 onwards, if not December 2023.
While we maintain our optimism surrounding the media company's robust IPs, it remains to be seen when the superhero fatigue may end , with the management already delaying several of its upcoming Marvel movies. The latter is likely attributed to the underwhelming box office returns thus far, while partly delayed by the strikes.
DIS 10Y Stock Price
We believe that Mr. Market and shareholders are keenly aware of these headwinds as well, with the DIS stock already returning most of its hyper-pandemic and pre-pandemic gains, drastically returning to its 2014 levels.
It is also uncertain when bullish support may materialize, given the stock's lower lows and lower highs since the March 2021 top.
DIS' Top & Bottom Line Drivers
We believe that DIS' headwinds have yet to end as well, since it may have to fork out approximately $15B for Comcast's ( CMCSA ) 33% stake in the streaming service, Hulu. This is based on our assumption that Hulu may be valued at $45B, in our previous CMCSA article here , with an FWD EV/Revenue valuation of 4x, thanks to its high growth trend.
It also remains to be seen if its rumored linear TV divestment may occur, as a speculative way to raise funds for the potentially expensive Hulu acquisition. While its linear networks may not be a revenue driver at $2.6B ( -61.1% QoQ /-10.3% YoY) by the latest quarter, it is a bottom-line driver at $0.8B (-57.8% QoQ/in line YoY) for the entertainment segment after all.
While it is unknown how the DIS management may actually execute the divestment, we believe that it may be a mistake to sell off its profitable cable channels to pay for the currently unprofitable Hulu, despite cable's irreversible secular decline and the potentially " accretive synergy/churn benefit worth $30B."
For now, the media company already reports a moderating long-term debt of $42.1B (-5.4% QoQ/-7% YoY) and growing cash/short-term investments of $14.18B (+23.8% QoQ/+22.1% YoY) by the latest quarter.
Depending on the DIS management's choice of fund-raising for Hulu, be it through debt, share dilution, and/or cash, we believe that its near-term prospects are uncertain, especially since Iger continues to push for a potential reinstatement of dividends before the end of the calendar year.
If a dividend is declared, we believe the sum may not match the annualized sum of $1.76 prior to the suspension in FY2019, attributed to its reduced Free Cash Flow generation of $4.9B in FY2023 (+345.4% YoY), compared to FY2019 FCF levels of $8.7B (-11.2% YoY).
As a result of these developments, we believe that things may get worse for DIS, before it gets better.
DIS's Valuations Have Merely Normalized To Its Historical Means
DIS Valuations
For now, DIS' FWD valuations appear to be drastically moderated compared to their 1Y and 5Y means.
However, we would like to highlight that its FWD EV/EBIT of 13.96x and FWD P/E of 19.95x have only normalized from the hyper-pandemic heights of 66.93x/479.99x to its 3Y pre-pandemic means of 13.72x/18.01x.
Based on DIS' FY2023 EBIT generation of $12.9B (+6.6% YoY) and its FQ4'23 share count of 1.83B, we are looking at an EBIT per share of $7.04 (+6% YoY). Combined with its FWD EV/EBIT valuation of 13.96x, it appears that the stock is trading well below its fair value of $98.27.
The Consensus Forward Estimates
For now, the consensus forward estimates seem to be rather optimistic, with DIS expected to record a top and bottom line CAGR of +6.2% and +8.7% through FY2026, reversing the decline in its EBIT profitability at a CAGR of -2.3% between FY2017 and FY2023, respectively.
Based on the consensus FY2026 adj EBIT estimates of $16.5B, it appears that there is still an excellent upside potential of +42.4% to our long-term price target of $125.77 as well.
While these growth projections may occur in the far future, thanks to its highly profitable theme park business and improving monetization of the D2C segment, we are not certain if the floor to the DIS stock's decline may materialize in the near term. This is especially with the relatively intense FY2024 content and capex spending guidance of $25B (-8% YoY) and $6B (+20% YoY), respectively.
This is compared to its FY2019 levels of $17.6B and $4.9B, implying that we may see its FCF generation temporarily disappoint, depending on the speculative divestment of its linear networks.
So, Is DIS Stock A Buy , Sell, Or Hold?
DIS 1Y Stock Price
As a result of the mixed prospects, it is immediately apparent that the DIS stock is only suitable for growth-oriented investors looking for undervalued contrarian plays.
While we are cautiously optimistic about its long-term prospects, there may be more pain over the next few quarters of uncertainties, with it remaining to be seen if the $80s bottom may hold.
Therefore, while we may rate the DIS stock as a Buy, investors may want to observe its movement for a little longer, before adding according to their risk appetite and dollar cost averages, preferably at its tried-and-tested support level of $80s for an improved margin of safety.
Additionally, investors should closely monitor the management's next few moves, since they may be crucial in reversing Mr. Market's currently pessimistic sentiment.
For further details see:
Disney: More Pain Likely - Only For Contrarian Buyers