I am bullish on Disney (DIS) as it has a very strong moat, solid long-term growth prospects, and general bullish sentiment from Wall Street analysts.
Disney is headquartered in Burbank, California, and was founded in 1923. It has today grown into one of the biggest media and entertainment conglomerates and continues to expand into new spaces today. The business segments include media networks, studio entertainment, experiences & products, parks, and DTC & international.
While the company is best known for its studio entertainment and theme parks divisions, the company’s fastest-growing division is its online streaming business.
Strengths
With a century of business in the books, DIS has built up a vaunted competitive position in the entertainment industry.
Between its numerous wildly-popular story franchises that each have devoted fanbases, world-class brands, highly talented workforce, economies of scale, massive marketing, distribution, consumer networks, a treasure trove of consumer data, and strategically-located theme parks across the globe, it is hard to find another entertainment company that can stand toe to toe with Disney.
The company is now leveraging its competitive strengths to grow its presence in the sports and online streaming industries. Both of these new businesses offer substantial growth potential for Disney.
Recent Results
Disney recently reported Q1 results for the period ending January 1, 2022. Diluted earnings per share from continuing operations came in at $0.63, while diluted earnings per share came in at $1.06. The company also posted record revenue and operating income at its domestic parks and resorts and launched a new franchise with Encanto.
Furthermore, its Disney+ subscription service saw its total number of subscribers soar to 196.4 million as 11.8 million subscribers joined Disney+ in Q1 alone.
Looking ahead, Disney expects its theme parks and experiences business segment to see a strong operational recovery as COVID-19 mandates have largely been lifted, and consumers are ready to resume traditional habits.
Valuation Metrics
DIS stock looks overpriced at the moment. Its forward EV/EBITDA ratio is high relative to its history at 17.9 times compared to its historical average of ~12 times (measured as a pre-COVID-19 average from March 2017 to February 2020). Moreover, its forward price-to-normalized-earnings ratio is elevated at 28 times compared to its historical average of 18 times.
Wall Street’s Take
According to Wall Street analysts, DIS earns a Moderate Buy consensus rating based on 14 Buys, five Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Disney price target of $193.06 puts the upside potential at 45.3%.
Summary and Conclusions
DIS stock is boosted by the company’s profile as a leading entertainment company and all that comes with it. Its world-class brands and employees, numerous avenues for growth, and solid balance sheet position it well to create shareholder value for years to come.
While its shares currently look richly priced relative to historical averages, a big reason for this is simply that COVID-19 headwinds have temporarily hampered results. Moving forward, analysts expect the business to rebound sharply as COVID-19 headwinds dissipate.
When taking into account this fact, the stock looks more reasonably valued. As a result, Wall Street analysts are generally bullish on the stock here and give it an average price target that implies substantial upside potential over the next year. As a result, investors might want to consider adding shares here.
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