The Walt Disney Company (DIS) is an entertainment conglomerate. It operates several theme parks throughout the United States and internationally. Disney also operates the media platform Disney Plus and television channels like ESPN and several others.
I am neutral on DIS stock. (See Analysts’ Top Stocks on TipRanks)
From Covid to Recovery
Disney suffered terribly from the COVID-19 pandemic, yet the stock has made more than a full recovery. Theme parks were shut down globally during much of 2020. This event was unprecedented in its scope and lasting effect. Luckily for Disney shareholders, the company has other divisions that were able to thrive during this time, including Disney Plus.
Park attendance declined more than 70% from 2019-2020 due to the aforementioned closures. Visitors fell from 13 million per month in 2019 to just 3.6 million per month in 2020. As would be expected, revenues fell by more than 40% from Q4 2019 to Q2 2020.
Revenues have still not recovered fully. In fact, quarterly revenues for the three months ended June 30, 2020, were nearly 16% below the same period in 2019. The company earned $0.98 per diluted share for this period in 2019 and only $0.50 per diluted share in Q2 2021.
Stock Rises to All-Time Highs
Despite this weakness in fundamentals, the stock reached all-time highs in the first quarter of 2021 before pulling back. The stock price reached over $203 per share at one point. It has since drawn back almost 17%. The stock trades at a forward PE ratio of just over 34x. This is slightly above historical norms for DIS stock.
One of the reasons for optimism is the success of the Disney Plus subscription service. After reaching 50 million subscribers in 2020, it reached the 100 million milestone the very next year – in March 2021.
This amazing growth is despite heavy competition in the sector from several major players such as Netflix (NFLX) and Hulu. The Disney Plus segment is expected to produce more than double the revenue in 2021 than was produced in 2020, rising from $4.5 billion to $10 billion.
ESPN Sale – Possibly a Positive Move
Disney is said to be again exploring the sale of ESPN. This is something this author speculated upon back in July 2021, and it seems to be coming closer to fruition.
Contrary to popular belief, sports are in trouble. Numerous issues from high costs of attendance, to free agency, to politics have alienated fans. ESPN has never been highly profitable as they overpay for live sports broadcasting rights.
Note that Disney does not specifically break down revenues from ESPN on a standalone basis. However, analysts have for years estimated the revenues and subtracted the television contracts to reveal a struggling segment.
Meanwhile, sports ratings and attendance are suffering. There is a generational problem as younger viewers watch full-live games far less than previous generations. Perhaps they have more entertainment options or maybe the commercial interruptions have finally hit critical mass.
The saving grace for the sports leagues has been gambling. Sports betting has experienced a meteoric rise. The leagues recognize this and have gone all-in on the trend. Previously, there were no professional teams in Las Vegas due to gambling. Now, there is an NHL and NFL team, with chatter of an MLB and NBA franchise relocating.
The problem for Disney is that gambling, like politics, does not fit with the family-friendly image. The sports betting trend may also prove to be fleeting. Most bettors are not profitable and the casual bettor may drift away.
Wall Street’s Take
Turning to Wall Street, Disney has a Strong Buy consensus rating, based on 15 Buys and four Holds assigned in the past three months. The average Disney price target of $215.06 implies 26.1% upside potential.
Conclusion on Disney
Disney has rebounded quite nicely from the pandemic. If pent-up demand is greater than predicted, the company may experience great revenue recovery over the next one or two years.
Current EPS metrics are weighed down by loss-making segments. One of these is likely to be ESPN. It would be a positive move to rid themselves of this anchor and focus on the company’s bread-and-butter theme parks and Disney Plus subscription service moving forward.
Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.
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