Its expansive portfolio of products from theme parks and movies to news is music to the ears of investors
New York-listed, The Walt Disney Co, is a diversified worldwide entertainment company with operations in two segments: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP).
For Disney’s DMED segment, its significant lines of business include linear networks, which consist of domestic channels like ABC and ESPN, international channels Disney and Fox and a 50% equity investment in A+E Television Networks, which operates a variety of cable channels like Disney+, ESPN+, Hulu and other direct-to-consumer streaming services. Disney’s content sales and licensing include the sale and licensing of film and television content to third-party television and subscription video-on-demand services, theatrical distribution, home entertainment distribution, music distribution and staging and licensing of live entertainment events on Broadway and around the world.
For Disney’s DPEP segment, its significant lines of business include Parks and Experiences, which consists of theme parks and resorts, along with others like Disney Cruise Line and Disney Vacation Club. Other consumer products include the licensing of trade names, characters, visual, literary and other IP to various manufacturers, game developers, publishers and retailers throughout the world, and the sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, comic books and magazines.
For its most recent FY2022 ended Oct 1, 2022, revenue was up 23% y-o-y, with operating income up 56% and net income from continuing operations up 58%. Operating cash flow was also up 8% for the year. FY2022 saw record results for its DPEP segment and outstanding subscriber growth for the company’s direct-to-consumer (DTC) services, which added nearly 57 million subscriptions for the year to a total of more than 235 million.
Moving forward, given the rapid growth of Disney+ in just three years since its launch as a direct result of the company’s strategic decision to invest heavily in creating content and rolling out the service internationally, Disney expects its DTC operating losses to narrow going forward and that Disney+ will achieve profitability in FY 2024.
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Given that the company’s primary focus is on DTC and streaming, it is positioning itself better in an economic downturn, as its DPEP segment would be adversely affected. Although the demand for the parks and experiences segment has made a strong comeback in FY2022 due to pent-up demand, the rising costs of running this segment may thin margins.
The heavy investment into the DTC business segment is currently on operating losses, although subscription numbers have grown at a healthy rate due to pandemic-related headwinds, which caused interruptions in the park and experiences segment, along with film delays. Further, this focus on DTC and streaming is strategic, as Disney+, Hulu and ESPN’s new advertisement value for connected TV is ahead of competitors, enabling it to turn operating losses around through newer ad tiers.
The earnings did not inspire much confidence among investors, with a one-year total return of –34.6%. Last November, long-serving CEO Bob Iger — who stepped down in 2020 — was asked to take back his old job from his successor Bob Chapek. Disney has had over three years of positive earnings, operating cash flow and free cash flow, as shown in the chart.
Financial safety-wise, Disney’s current ratio of 1.0 times is adequate, and similarly, the company’s solvency is with a net debt-to-equity ratio of 0.38 times and interest coverage of over 4.2 times. Sentiments-wise, the company has 28 “buy” calls, five “hold” calls and no “sell” calls, with a consensus target price of around 25% above its current trading price of US$99.40 ($131). Based on our in-house valuations of the company, we believe that the intrinsic value of the company is around 20% above its current trading price. Walt Disney’s business model is solid with strong financials, and at current prices, investors can park their money in the company to take advantage of its undervalued status.
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Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
