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Will Locking Horns With Florida’s Governor Impact Disney Stock?
Stock Analysis & Ideas

Will Locking Horns With Florida’s Governor Impact Disney Stock?

America’s largest entertainment and media company, Walt Disney Co. (DIS), is weathering one of the biggest political storms in Florida, where it hosts its biggest theme park, Disney World.

Disney World will pay a high price for opposing Florida Governor Ron DeSantis’s “Parental Rights on Education Laws” on gender and sexuality. On Thursday, DeSantis stripped off Disney’s “special district status,” along with five other districts, and said, “It’s not right to have dissimilar treatment.”

Following the news, the DIS stock hit a fresh all-time low of $118.15 and ended the day down 2.8% at $118.27 on April 22. After surviving the pandemic and related closures, Disney shares have lost 24.5% year-to-date and lost 35.8% over the past year.

Let’s take a look at the entire story and whether or not, and to what extent, the chaos will impact Disney’s performance.

Special Tax Status

In May 1967, the then Governor of Florida, Claude Kirk, passed a law assigning special district status to the land where Disney was based, exempting the theme park from regulations and taxes. The status allowed Disney to self-govern the park and to undertake construction without having to go through lengthened regulatory processes, while skirting local environmental, planning, and other requirements.

Under the law, Disney would directly pay property and other taxes to two nearby counties, namely Orange and Osceola, for running their own services, including fire, emergency medical services, roads, wastewater management, and power generation.

How Did Disney Become a Bait in a Local Feud?

Disney is known to take a neutral stance on most political agendas. However, this time, it was compelled to choose a side and got stuck! At first, Disney was silent on all the gung-ho about the “Don’t Say Gay” bill passed by Gov. DeSantis and was even mocked for its lack of interest in the topic.

Later, however, Disney bent to the fury of its employees from the LGBTQ communities and their loyalists. Disney publicly opposed the bill and said that it stood by its LGBTQ employees. The Governor’s wrath was swiftm and Disney lost its special status.

Impact of the Law on Local Counties

Gov. DeSantis’s law banning “special district” status will become effective June 2023, and Disney is likely to challenge the law in court. However, striking off the law means that the local counties will end up bearing the cost of the services in the future that Disney had been paying for over half a decade.

As per stats, Disney pays an annual tax of around $105 million towards the services provided to Orange County. Plus, Reedy Creek receives additional annual revenue of $58 million from Disney to pay towards its bonds.

Alleviating the taxpayers’ belief that Disney’s cost burdens will be added to their shoulders, Gov. DeSantis said on Friday, “Don’t let anyone tell you that somehow Disney is going to get a tax cut out of this. They’re going to pay more taxes as a result of it.”

Impact on Disney

From the initial jitters of the chaos, it seems that Disney’s performance will more likely be hit by increased governance hurdles than financial impact. Even if Disney’s “special district” status is revoked, it does not stop its parks and resorts from functioning, nor will it stop people from flocking to its land.

The most important impact will be on the autonomy with which Disney has been functioning during the past five decades. Disney will have to undergo local construction and other rules for any further development at its park, and will also have to get regulatory approval for development, which will impact its plans and timelines.

Historically, Disney’s revenue contribution from Parks, Experiences, and Products has declined from close to 40% to around 25% between 2017 and 2021, primarily due to the pandemic-related shutdowns. However, the segment gained momentum in Q1FY22, with revenues ramping up to 50% again.

Even at a 50% contribution, Disney still has its Media and Distribution segment operations to offset any declines from the former segment, as was witnessed in the pandemic. Disney’s total revenues did not fall drastically owing to the park’s shutdowns, as its media segment boosted the growth.

Wall Streets View

Recently, Rosenblatt Securities analyst Barton Crockett initiated coverage of the DIS stock with a Buy rating and assigned a price target of $177, which implies 49.7% upside potential to current levels.

Based on record pricing levels and huge crowds arising from pent-up demand, Crockett expects the overall theme park sector to do very well. An uptick in international travel and the resumption of Disney’s cruise ships will also bode well for Disney.

In DTC streaming, however, the analyst is “skeptical about the sector, but sees Disney as relatively well-positioned as an early mover with scaled leadership, a global footprint, and a distinct brand.”

Turning to other Wall Street analysts, who are also highly bullish about the stock, they have awarded the DIS stock a Strong Buy consensus rating with 16 Buys and five Holds. The average Walt Disney price target of $186.79 implies 57.9% upside potential, making the stock a very attractive bet at current levels.

Key Takeaways

All in all, any slowdown owing to the enhanced governance framework post-June 2023 will only impact Disney to a limited extent, and the entertainment giant is sure to find a way to surpass the current temporary hurdles.

From the valuation perspective too, Disney stock is currently trading at a Price/Sales (P/S) multiple of 2.95x, which is lower than its historical average of 3.52x, reflecting that the company has more room to grow. There is no real major player in the parks and resorts segment who can steal Disney’s show.

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