Summary
A wave of negativity has hit Disney stock over the past few weeks post earnings.
Fears of the new Covid variant (Omicron) has put further pressure on the stock.
That said, we think its time to start looking at the Disney cup as “half full” instead of half empty.
Disney is one of our top stock picks for 2022.
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Drew Angerer/Getty Images News It’s always amazing to me how sentiment can shift so quickly on a stock. One minute the glass is “half full” and the next minute its “half empty”. However, this fickleness can provide great opportunities for investors willing to patiently wait for the tide shift again.
The Walt Disney Co. (NYSE: DIS ) certainly falls into this category right now.
After missing earnings expectations a few weeks ago and renewed Covid fears from the Omicron variant, investors seemed to have put Disney in the penalty box for now…with the shares sinking about 15% since Nov. 8th. Data by YCharts That said, we believe that Disney is the exact type of stock that you want to own going into 2022.
The company has “re-opening” exposure from its theme park business and stable recurring revenue (and cash flow) from its Disney+ (and Hulu and ESPN+) business…which we will believe will be a great combination over the next 6-12 months.
In the video below, we break down the whole trade for you (listen to this first as the commentary is a great introduction for the rest of the article). The Walt Disney Co.
Sector/Industry: Communication Services / Entertainment
Walt Disney owns the rights to some of the most globally recognized characters, from Mickey Mouse to Luke Skywalker. These characters and others are featured in several Disney theme parks around the world. Disney makes live-action and animated films under studios such as Pixar, Marvel, and Lucasfilm and also operates media networks including ESPN and several TV production studios. Disney recently reorganized into four segments with one new segment: direct-to-consumer and international. The new segment includes the two announced OTT offerings, ESPN+ and the Disney SVOD service. The plan also combines two segments, parks and resorts and consumer products, into one. The media networks group contains the U.S. cable channels and ABC. The studio segment holds the movie production assets.
(Source: YCharts) Source: Option Income Advisor
Disney currently has average rankings for Safety (5) and Value (6). We’ll dig into those rankings below.
Note that our rankings are from 1 (lowest) to 10 (highest). Safety
It’s no secret that the pandemic was rough on Disney as its theme park business (which represented over 30% of revenues) essentially shut down overnight. Not to mention the company’s reliance on the box office (which also disappeared). Hence the average Safety ranking of 5.
That said, Disney has fought its way back to profitability and is expected to earn $4.25 per share in fiscal 2022. The company expects earnings to grow even further in 2023 and 2024 to $5.73 per share (35% growth) and $7.30 per share (27% growth), respectively as theme parks and theaters remove capacity restrictions. Also, management expects Disney+ subscribers to more than double by 2024 (from ~120 million currently to over 230 million). Note that Disney’s fiscal year end is September.
Including Disney+, Hulu and ESPN+, Disney currently has ~170 million subscribers. Compared with Netflix’s (NASDAQ: NFLX ) current subscriber base of ~209 million…Disney’s subscriber growth has been nothing short of incredible. In other words, Disney accomplished in 2 years what it took Netflix ~8 years to do! Source: Option Income Advisor The company’s balance sheet also is extremely strong with $16 billion of cash/short-term investments. Valuation/Upside Potential Disney looks pretty attractive from a valuation standpoint and is currently trading at a decent discount to all of its long-term valuation metrics (on a forward basis). Source: Option Income Advisor Specifically, Disney is currently trading at 25.6x forward 2023 earnings and 2.9x forward 2023 sales.That said, earnings are expected to grow over 25% per year for the next few years…which would favor a little multiple expansion from here.If you put a 25x-30x multiple on consensus forward earnings of 7.30 per share in 2024, that would equate to a $182.00 – $219.00 stock price (representing 23%-48% upside from current levels)! Cash-Secured Put Analysis While we believe that Disney is a “strong buy” at current levels, if you are concerned about more downside volatility ahead, we also love the […]
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