The Walt Disney Co. (DIS, Financial) owns some of the world's most iconic brands and has a vastly diversified business model. Since its initial public offering in 1957, the share price has risen by over 5,800%. However, since its high of $197 per share in March 2021, the stock price has been cut in half. More recently, a dispute with Charter Communications Inc. (CHTR, Financial) put further downward pressure on the stock and it now sits at its lowest share price since 2014.
In this discussion, I will break down the company's business model, the dispute with Charter and its financials to understand if this volatility could be an opportunity. Let’s dive in.
Iconic business model
Disney is most known for its 11 popular theme parks, located in Florida, Paris, Tokyo and even China. The company also has a thriving movie business and, of course, its streaming service Disney+, which saw huge growth during the lockdown of 2020.
The common thread between all of the company’s ventures is its iconic portfolio of characters and brands. This includes classic films such as "Cinderella," "The Lion King," "The Little Mermaid" and many more. Now you may think Disney only makes content for kids, but the business also owns a variety of popular movie studios thath make content for all ages. A prime example is LucasFilms, the creator of the Star Wars franchise, that the company acquired in 2012. Then, of course, we have Pixar ("Finding Nemo," "Toy Story," etc.), which was acquired in 2006.
Disney even owns Marvel, the home of the Hulk and other super heroes, as well as 20th Century Fox, which owns "X-Men," "Fantastic 4" and "Avatar."
The beauty of the company's business mode is every couple of years it can revamp its movies, which makes it an ongoing cash cow.
Charter dispute
On Aug. 31, Disney’s channels, including ESPN and Fox, disappeared from Charter's cable service. This “blackout” occurred right before the U.S. Open tennis tournament, which left nearly 15 million fans in uproar. This was caused by a dispute over channel fees between the two companies.
Since then, the two companies have reached an agreement which will enable Charter to offer some of its ad-supported streaming services, such as Disney+ and ESPN+, to its customers. This deal was done just hours before the Monday Night Football season, which was shown on ESPN.
Charter will pay Disney “market-based rates,” which is estimated to be around $2.2 billion. Although this dispute was not ideal, I believe it was actually not too bad for the company.
Financial turnaround
Disney reported mixed financial results for the third quarter of 2023. Its revenue of $22.33 billion missed analyst forecasts by $201.4 million and rose by just 3.84% year over year.
Its Disney+ subscribers rose by a staggering 800,000 during the quarter. This was a positive sign given the company is focusing on business economics as opposed to pure subscriber growth.
Disney+ average revenue per user rose by 11 cents, driven by higher advertising revenue. Over 40% of its new subcriber additions adopted the ad-supported tier.
Its parks continued to grow and the business announced new themes, such as Frozen and Avatar, moving forward, which should help to attract new guests.
Its cruise line also showed surprisingly strong revenue growth as, in the fourth quarter, its booked occupancy is 98%. Disney is planning to add two more ships to its fleet in 2025 and 2026, doubling its global capacity.
Aggressive cost cutting
Disney has been criticized for its cash burn, especially in the streaming business. A positive is CEO Bob Iger (who has returned to the company) is on track to execute $5.5 billion in cost savings.
Its direct-to-consumer operating income rose by $1 billion in the past three quarters, so the company expects this business to be profitable by the end of the fiscal year 2024.
For the quarter, its overall operating income was $2.7 billion, up 11.57% year over year.
Its balance sheet contains $11.5 billion in cash and short-term investments as well as have fairly high debt of $47 billion.
Valuation
Disney trades with a price-sales ratio of 1.7, which is lower than its five-year average.
Its price-earnings ratio is fairly high still at 45. On a non-GAAP basis, though, the ratio is 25, which is below its five-year average.
Its price-to-cash flow ratio of 20 is also lower than its historical average for the same period.
Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line indicates a fair value of $161 per share. Therefore, the stock is considered significantly undervalued at the time of writing.
Final thoughts
Disney is a tremendous company that owns a number of iconic brands. Its business model is diversified across its traditional parks, while its streaming service is benefiting from cord cutting globally. For a company of this size, one would expect greater profitability, so I am glad to see the CEO is focusing on this.
