Long considered a blue-chip stock, The Walt Disney Co. (DIS, Financial) has run into issues with the stock currently at a similar level to where it traded at toward the end of 2014. A potential deal with the National Football League, though, could help change its fortunes.
Company profile
Disney is a media and entertainment company best known for its iconic animated characters and theme parks. It is also home to the popular Marvel Comics and Star War franchises, as well as sports network ESPN. The company has three segments: Entertainment, Sports and Experiences.
The Entertainment unit consists of its linear TV networks, including ABC, FX, Freeform and Disney channels, among others, its Disney + and Hulu (67% ownership) streaming services and its content licensing and theatrical distribution business. For fiscal year 2023, which ended in September, the segment accounted for about 46% of revenue, but only 11% of its operating income.
The company's Sports segment includes its ESPN branded TV channels, its ESPN+ streaming service and its EPSN and Star branded international channels. The segment generates revenue through advertising, affiliate fees, subscription feels and licensing. In 2023, the segment represented about 19% of its revenue and operating income.
The Experiences business includes its theme parks and resorts, Disney Cruise Line, Disney Vacation Club, its National Geographic Expeditions (73% ownership) and Adventures by Disney Tours, as well as licensing and consumer products. Last year, the segment accounted for about 37% of its revenue and 70% of its operating income.
Valuation
Shares of Disney currently trade at an enterprise value/Ebitda multiple of 12.10 times the fiscal 2024 (ending September) consensus of $18 billion. Based on 2025 Ebitda projections of $20.2 billion, it trades at a 10.80 times multiple.
On a price-earnings basis, the company trades at 21.40 times the 2024 consensus of $4.37 and 7.70 times the 2025 consensus of $5.27.
Revenue is projected to grow over 4% in 2024 and over 5% in 2025.
What's gone wrong and what could go right?
While there are a lot of narratives on Disney losing its fanbase, the company's biggest issues have actually come on the cost side. Gross margins understandably fell off a cliff during the pandemic, having been around 45% between 2014 and 2018 before dropping to about 33% in 2020. However, while revenue has recovered, its gross margins have not, as much of its revenue gains have come from lower-margin ventures. At the same time, selling, general and administrative costs have also risen considerably, going from $8.9 billion in 2018 to $15.3 billion in 2023.
Now while it had different operating segments pre-pandemic, what I would call core Disney, such as the parks and product licensing, have seen strong growth and operating margins. This continues to show the brand's popularity among its fans.
On the media side, Disney previously separated out TV from film, while it is now separating out TV and film from sports. On the media side, linear TV has generally held up fairly well over the past few years, with affiliate fees and even advertising revenue up a bit. However, while streaming has brought in a lot of new revenue, it has been at low margins and an operating loss.
On the film side, while revenue in 2023 was down about 9% versus fiscal year 2018, overall production and operating costs were much higher despite the number of big-budget movies it put out into theaters. I would note, however, that amortization does play a role in the those costs and on operating income. That said, 2023 saw a couple of big-budget moves just not perform that well at the box office, including "Indiana Jones and the Dial of Destiny" and "The Marvels."
Now to fix its issues, the company has implemented a restructuring program. It expects to save approximately $7.50 billion a year by the end of fiscal 2024 through the reduction of content spending (excluding sports) and SG&A. Content cash spend will be reduced by $4.50 billion, while SG&A will be reduced by $3 billion a year.
With regard to streaming, the company said it will use a “unified, cohesive and highly coordinated approach to marketing, pricing and programming.” The company has increased some prices, and it will look to push the bundling of its streaming services. It was also look to do things such as use technology to reduce account sharing.
With regards to sports, meanwhile, Disney is looking to turn ESPN into a digital sports platform, and it is looking for various partnerships with regard to marketing, content and technology. It is also trying to create a “soft” landing as the transition from linear to streaming continues.
ESPN has always had the highest cable carriage fees, which is currently estimated to be over $9 per sub a month. That's about 3 times higher than any other channel, with TNT estimated to get the second-highest carriage fee at $3 per sub. The ever-increasing carriage fees have helped boost the segment despite the continued loss of linear subs from cord-cutting. This dynamic could make a soft landing very difficult to achieve, and is one of the biggest risks facing the company.
However, there have been reports that the NFL and ESPN have been in talks about the league taking an equity stake in the network and ESPN taking over NFL Media, which includes the NFL Network. This would be a huge win for EPSN that could make it the sports winner in the streaming age.
On the film front, Disney really needs to reignite its Marvel and Star Wars franchises. Superhero movies are still popular, but some recent movies have been considered flops at the box office. Marvel needs to go back to its roots. Meanwhile, Disney does look set to introduce a new Star Wars movie to the big screen based on the success of its Mandalorianseries. "The Mandalorian & Grogu"could hit theaters in 2026.
Conclusion
Fixing Disney's issues is not going to be easy, but I also would not write off the company just yet. At some point, there needs to be a shake-up in the world of streaming for companies like Disney and Warner Brothers Discovery (WBD, Financial), which I wrote about previously. Content is still valuable, but these companies need to learn to make these services meaningfully profitable.
The biggest future issue for Disney is ESPN, which has long looked like a business that could see a potential earnings cliff. However, if it can become the main network for the NFL by giving the league an equity stake in it, then it could cement itself as the most important sports property in the sports transition to streaming services.
Given its valuation and this potential tie-up, Disney may be worth a closer look.
