Stock Analysis & Ideas

Disney Earnings: New Troubles for the House of Mouse

Entertainment juggernaut Disney (DIS) has been struggling in the last few weeks, and its latest earnings report only underscores the trouble. It was down over 4% in premarket today. The stock has recovered throughout the day, but it’s still down so far.

Despite the sheer number—and size—of the problems it’s seen in the last few weeks, I’m still bullish on Disney. The earnings report showed it managed to pull off a win that wasn’t seen in other parts of the market. However, it may still have a lesson to learn about the degree to which customers will stay customers in the wake of rising inflation.

The last 12 months for Disney stock looked fairly stable at first, until early November 2021. That kicked off an avalanche that buried Disney, taking about half the company’s stock value with it.

Disney’s earnings report proved a shaky foundation for future hopes. The company posted adjusted earnings of $1.08 per share and revenue of $19.25 billion. In perhaps the brightest spot, Disney+ streaming subscriptions increased to 137.7 million, which beat StreetAccount projections looking for 135 million.

Wall Street’s Take

Turning to Wall Street, Disney has a Strong Buy consensus rating. That’s based on 15 Buys and five Holds assigned in the past three months. The average Disney price target of $160.95 implies 52.9% upside potential.

Analyst price targets range from a low of $110 per share to a high of $229 per share.

It’s a Fairly Even Mix for Investor Sentiment

Right now, Disney’s position is not looking good. The chances of it outperforming the market are fairly low, based on the TipRanks Smart Score, which stands at a 4 out of 10. That’s the lowest mark that still remains “neutral” before slipping into “underperform” outright.

Undoubtedly, hedge fund involvement in Disney proved the biggest problem. Based on the TipRanks 13-F Tracker, involvement dipped once already between September 2021 and December 2021.

However, it outright collapsed between December 2021 and March 2022. In December 2021, hedge funds held a little over 32.8 million shares. In March 2022, that number plunged to just under 3.59 million.

As for retail investors who hold portfolios on TipRanks, that proved a brighter spot. TipRanks portfolios holding Disney in them were up just under 0.1% in the last seven days but up 1.4% in the last 30 days.

Insider trading, meanwhile, is more of a puzzle. In the last three months, insider trading was clearly buy-weighted, with 12 buy transactions against four sell transactions.

In the last 12 months, it’s been a much different story. Buy transactions still led the way, but only by a two-to-one ratio. There were 50 buy transactions against 25 sell transactions.

Finally, there’s the matter of Disney’s dividend history. While many companies cut back or halted their dividend after March 2020, Disney saw the problems coming and halted theirs in December 2019. It’s been halted ever since.

A New Learning Curve for Disney?

Like many companies, the pandemic forced changes at Disney. Long-time cash cows like theme parks and cruises were forcibly shuttered by government mandate.

Some have yet to come back fully. Disney properties in Asia struggle under the dual weight of recent COVID-19 resurgences and government responses.

Moreover, Disney’s recent struggle with the state of Florida has hit hard. After getting involved with Florida House Bill 1557—objecting to the bill in question—the state of Florida responded by turning its attention to the special land situation Disney occupies.

Specifically, it turned its attention to the Reedy Creek Improvement District, which gives Disney control over much of its own issues, like waste disposal and security.

Add to this concerns about the rising costs of accessing a Disney property—some of those concerns go back to before the pandemic—and a bad situation only looks worse.

Just to top it off, the Star Wars: Galactic Starcruiser attraction is drawing fire. Specifically, customers and outsiders are concerned about its lack of demand and pricey add-ons.

Yet, in all this, Disney+ once again proves the shining star. In an environment where Netflix (NFLX) is losing subscribers, Disney+ has gained subscribers.

That’s no mean feat, and it likely owes a lot to the massive range of Disney-branded content and original programming available on the site. Disney+ is on track to meet its current goals: between 230 million and 260 million subscribers by Fiscal 2024.

Having an entire streaming service on hand is definitely good for Disney. If Disney were nothing but Disney+, it wouldn’t be doing badly at all. However, Disney is a lot more than its streaming service.

That’s what makes it attractive as an investment; you’re not just getting a chunk of a Netflix-style streamer. You’re getting television channels, cruise lines, theme parks, merchandising, and so much more.

Granted, right now, it’s more vulnerable than ever to threats to discretionary income like those posed by a recession. Nonetheless, when the recession and COVID-19 restrictions fade, then Disney’s fortunes can come roaring back.

Concluding Views

Here’s the key takeaway from all this: Disney is changing. For good or ill, it’s certainly a whole different picture from the one many knew even just 10 to 20 years ago. Disney+ will be a major part of Disney’s revenue going forward, even as the parks falter and sputter in coming back to full tilt.

Throw in a declining economic picture that’s likely to hamper that comeback even further, and things look a bit worse for Disney. However, if Disney can continue to learn its lessons—stay out of politics, don’t get entire governments angry, make customers happy—then it’s got a great chance of returning to its former prominence.

That’s why I’m bullish on Disney. These lessons aren’t tough to learn. To some extent, Disney is already familiar with them. Throw in the fact that Disney is currently trading well below its lowest price targets right now, and that suggests solid upside potential with a likely return to form not too far away.

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