- Reports fiscal Q3 2019 results on Tuesday, August 6, after market closes
- Revenue Expectation: $21.46 billion
- EPS Expectation: $1.72
It took Walt Disney (NYSE:DIS) stock almost four years to break through its all-time high of $122, a level it first touched in August 2015. Shares now are slightly lower than its new all-time high of $147 it set in July.
The entertainment conglomerate's close to 30% gain this year has been spurred by a stellar year at the box office and lofty expectations for its new Disney+ streaming service.
But while Disney is a solid company, investors have gotten ahead of themselves with the celebrations. The projected numbers for Disney+ don’t warrant the enthusiasm, its media business remains a pain point and this year’s box office numbers are more of a perfect storm than a indication of things to come.
Parks Provide The Stable Revenue
Disney’s revenue from its parks and hotels is arguably one of the most stable revenue streams in all of the entertainment business and the company is furiously working to expand on this front.
In the six months ended March, Disney parks brought in $13 billion dollars, 5% more than in the first six months of its fiscal 2018. This year it opened a big expansion in Tokyo’s DisneySea, as well as opened a new Star Wars attraction in its Disneyland resort in Anaheim. The same attraction will open in in Orlando on August 29.
Disney’s success with its parks and hotels is not limited to growing revenue, as its operating income is growing at an even faster pace. While the revenue grew 5% in the past six months, operating revenue grew by 12% year over year. Disney is managing to grow guest spending and attendance and increase occupied room nights at its hotels. Last quarter attendance was up 1% and spending per capita was up 4%. Overall, this is an extremely solid revenue source for Disney and I expect it to remain one for the foreseeable future.
Cord-Cutting Still Taking A Bite From ESPN
Undoubtedly Disney has been hurt by the cord-cutting movement. In fiscal 2018 it lost 2 million ESPN subscribers, down to about 86 million subscribers. In 2011, Disney reported 100 million subscribers. The trend continued last quarter as Disney reported a drop of 2% in ESPN subscriber revenue.
The positive side is that even though Disney’s old-school TV segment is struggling with subscribers, higher affiliate fees Disney charges did offset the drop in subscriber revenue and the segment actually grew by 3%. Its operating income remained the same.
Disney’s media network was and still is a pain point for the company.
The company’s struggles there eventually led to an attempt to revive its media empire by entering the streaming business in Disney+.
Disney+ Will Be Popular, But Not a Cash Windfall
The excitement around Disney+ is one of the major reasons the stock is up so much this year. The service is expected to be available to U.S consumers on Nov. 12 for price of $6.99 a month. This is very aggressive pricing considering Netflix (NASDAQ:NFLX) costs twice as much. But much of the excitement priced into the stock now will take years to work out.
Disney recently said it expects 60 to 90 million subscribers at the end of fiscal 2024. At $6.99 apiece, assuming Disney hits 75 million subscribers, Disney+ should create about $500 million of monthly revenue, or $1.5 billion of revenue every quarter. This should add 10% to Disney’s current quarterly revenue in five years. Furthermore, Disney is expecting heavy spending in the next three years to finance and grow the project. Disney’s estimate is that Disney+ will be profitable only in 2024.
I’m not currently impressed by the growth numbers Disney expects. Netflix has 150 million subscribers and Disney adding only 10% in quarterly revenue in five years isn’t quite the revival many expect.
A Box Office 11 Years In The Making
Disney surpassed its own all-time box office record at the end of July taking in $7.67 billion after the last weekend of the month. And it's not even done for the year.
Later this year, the company will be releasing “Star Wars: The Rise of Skywalker” in December, as well as sequels for “Frozen 2” in November and “Maleficent: Mistress of Evil” in October.
Disney’s movies this year have performed incredibly well. Led by “Avengers: Endgame” with $2.79 billion worldwide, Disney has already released four $1 billion movies this year (Endgame, “Captain Marvel,” “Aladdin” and “The Lion King.”)
Disney has strong franchises, especially in the light of its acquisition of 21st Century Fox. But investors should take this year’s crop for what it is, an extraordinary outlier. This is not to say that Disney won’t come up with new hits, but a year like this was literally 11 years in the making (since the first Iron Man movie was released in 2008).
Bottom Line
Disney is doubtless a strong business. But I do believe Disney’s gains this year have been largely built on excitement regarding Disney+ which I find premature, and on box office results which will be borderline impossible to replicate.
That being said, Disney is not overly expensive at the moment. It’s Trailing 12 Months PE ratio of 15.9x is below its 5-year average of 18.2x and it would be a classic income stock if its dividend returned more than a measly 1.24%.
I don’t believe $145 in an especially attractive entry point for new investors, given the reasons for Disney’s latest appreciation in value. Investors interested in initiating a long-term position can start to scale in slowly, as Disney is still a solid company to have in your portfolio. But I’d focus on buying dips rather than paying the full price the market demands today.