With its shares down more than 40% from its 2021 high, The Walt-Disney Company (NYSE:DIS) has had a challenging year dealing with various headline-grabbing controversies in addition to macro headwinds. We are reiterating a positive call on the stock and anticipate the next significant move to be higher ahead of next week’s fiscal Q3 announcement.
Reports of a high visitor count at all of Disney’s main parks and the ongoing growth of streaming services may pave the way for an earnings beat. A fresh upswing in the stock price may be sparked by Disney’s potential to dismiss worries about a downturn in consumer spending and broader economic difficulties.
In our opinion, this is a chance to acquire a premium market leader at a discount who still has a promising future.
Why Did DIS Shares Drop?
A milestone was reached when the company last announced its Q2 profits in May, surpassing its pre-pandemic Q2 2019 benchmark with revenue of $19.2 billion, up 29% year over year.
However, despite being up 37% from the same period the previous year, EPS of $1.19 was still 32% behind the figure three years ago, underscoring the weak earnings environment. The enormous financial commitments made to Disney’s direct-to-consumer streaming services, such as Disney+ and ESPN+, have been the problem in this instance.
This year, the operating income for Disney’s Media and Entertainment Distribution sector decreased, preventing the company from achieving even greater profitability. Results from competitors like Netflix, Inc. (NFLX), which has lost subscribers, have served to temper expectations of Disney’s streaming potential compared to the strong optimism for subscriber growth plans in 2021.
All of this is occurring in the more challenging macro environment. Disney is concerned that declining consumer spending may pressure its current operating momentum. This concern is fueled by record inflation, rising interest rates, and worries about the state of the world economy. While we suspect that Disney may still be defying the trend, this will be a significant theme to follow in the upcoming quarterly report.
Finally, we touched on this year’s controversies surrounding Disney. A few months ago, the business came under fire for its response to Florida’s “Parental Rights in Education” legislation, which opponents claimed violated the LGBTQ community’s rights to free speech and equal protection under the law. Supporters of the legislation thought Disney overreached by getting involved in politics, while one side of the debate felt the firm didn’t do enough to stop the proposal.
However, other than the internet uproar and demands for a boycott of Disney goods, there hasn’t been any evidence that the problem had a significant financial impact on the business. We can say that it serves as an additional layer of volatility, which helps explain some of the negative sentiment toward the stock.
Q3 Earnings Preview for DIS
In what we perceive to be a crucial earnings release scheduled for August 10th after the market close, Disney will have the chance to clear the air the following week. According to the current consensus, EPS will be $0.99, which, if realized, would be a 24% improvement over the same time last year. The company’s projected revenue of $21.0 billion, up 23% year over year, would shatter the previous record for a quarter, primarily due to the expansion of streaming.
Numerous indicators point to a strong top and bottom line with space for Disney to outperform forecasts. First, all signs point to the company’s primary parks and resorts division remaining unaffected by any economic slowdown.
Throughout the entire year, reports about how busy and frequently sold out the parks are through the necessary reservation system are published in specialized magazines with an emphasis on Disney. This extends to the properties of not just Disneyland in California but also Disneyland Paris and the resorts in Florida.
The overall strong desire for leisure and tourism as a continuation of the pandemic’s pent-up demand is the focus here. A further factor at work is Disney’s aggressive pricing policies, which apply to everything from food and drink prices to hotel room rates, in addition to daily entry tickets and annual passes. Once more, trends indicate that customers are willing to spend a lot for the Disney experience without the supply lagging.
Higher operating segment margins are the direct result of this influence. The current was confirmed in the business’s most recent quarterly report, although we anticipate that most of the summer travel season will be covered in this Q3.
For comparison, Q2 “Parks, Experiences and Products” segment operating income increased from $1.5 billion and a 24% margin in Q2 2019, the year before the pandemic, to $1.8 billion and a 26% margin in Q2. In other words, the parks industry is already more successful than ever, which helps balance the investments made in streaming.
The outcomes from the media and entertainment distribution division, which includes the streaming services, are once more the most significant unanswered question and the area on which most eyes will be focused.
With the addition of 7.1 million Disney+ subscribers over the past year in the U.S. and Canada to 44.4 million, or 1.5 million just since Q1, Disney is still experiencing strong growth in this area. With 43.2 million members, an increase of 39% year over year, the momentum has also been strong worldwide.
When compared to a plethora of competing streaming services, Disney+ is appealing due to the strength of its back catalog, blockbuster titles like “Marvel,” and vintage animations. The Book of Boba Fett and “Obi-Wan Kenobi,” two Star Wars originals that have grown to be the most popular series on Disney+, probably helped keep subscribers interested and can ensure a great outcome this way quarter.
More impressive has been the growth of ESPN+, whose subscriber base has increased by 62% to 22.3 million over the past year. The firm recently stated that the monthly subscription fee will now cost $9.99 instead of the previous $6.99. The impact is considerable, given that the extra $3 per member each month equates to over $800 million in extra revenue annually.
Investors might also anticipate a future increase in the monthly membership fee for Disney+, which, compared to Netflix or even “Amazon Prime” from Amazon.com, Inc. (AMZN), appears to be a bargain at the current monthly charge in the U.S. at $7.99. However, nothing has yet been revealed.
With this earnings report, management updates on significant film release this year, such as “Thor: Love and Thunder,” which is currently in theaters, as well as “Black Panther: Wakanda Forever” and “Avatar 2,” which are scheduled for release later in the year, highlight the complexity of Disney’s business.
Forecast for the price of DIS
We have the impression that the market has underestimated Disney’s expansion and the underlying trend of firming profits. We observe that management’s price decisions across all segments are a potent instrument that can increase profitability.
A solid performance from the Parks and Experiences division in the Q3 report could be enough to propel an earnings beat the following week, lifting shares. Positively, the stock price trade activity has improved recently, with DIS up roughly 20% from its most recent low. To the upside, a break above $112.50 can restore control to the bulls for an extended rise.
The argument in favor of Disney is that as results surpass forecasts, more significant revisions to long-term EPS predictions will make the company’s shares look to be getting cheaper over time. Consensus estimates predict that from an EPS forecast of $3.93 for the current fiscal year, earnings will increase to $5.41 in 2023 and $6.39 in 2024.
Considering that 2022 got off to a slower start than expected, the following year will benefit from a total period of normalized post-pandemic operations. The fact that DIS is currently selling at a 1-year forward P/E of 20x, in our opinion, is intriguing given this earnings growth velocity.
Final Reflections
We predict that Disney will release a tremendous third-quarter report, paving the way for a steady uptrend throughout the rest of the year. In the following months, a rise above $130 might be the upside target if there is a breakout over $110.
The sector operating margins and trends in streaming subscriber numbers will be under observation. We want to know from management whether or not demand levels at its parks continue to be extremely high.
Think about how risky the whole market environment is right now. The earnings outlook would be harmed if the existing baseline of global economic circumstances were to worsen into a deeper recession.
However, we are maintaining a more bullish outlook as long as consumer spending levels are mostly constant and inflation rates start to drift downward. Over the coming months, the continuing decline in petrol costs should boost consumer confidence and the overall economy.
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