To The Moon

$Walt Disney(DIS)$

Insider Selling at Disney Recently, Disney CEO Bob Iger sold approximately $43 million worth of shares on November 22. This substantial transaction coincides with Disney's stock being up 23% over the last year. However, a broader 10-year view shows a modest 25% gain, with shares significantly below their March 2021 peak near $200.

Earnings & Revenue

• Earnings Growth: Analysts forecast steady EPS growth over the next few years, with an anticipated EPS of $6.07 by 2025, improving the forward P/E to 19.01.

• Revenue: Over the past two decades, Disney's revenue nearly doubled, rising from approximately $52 billion to $92 billion. However, growth has been inconsistent, notably impacted by the pandemic.

Key Observations:

• Operating margin has improved from 5% (2021) to 13% (2024), signaling post-pandemic recovery.

• Free cash flow remains inconsistent but improving, forecasted at $413 million over the next year.

• Dividend reinstatement is notable, but growth is minimal at 2% CAGR over 20 years.

Performance Overview

In Q4 2024, Disney reported a 6% year-over-year increase in revenue, reaching $22.6 billion, while adjusted earnings per share (EPS) surged 39% to $1.14. Both figures surpassed analyst expectations.

For fiscal year 2025, Disney anticipates high single-digit growth in adjusted EPS compared to FY2024. The company expects its Entertainment Direct-to-Consumer (DTC) segment to contribute approximately $875 million in additional operating income. However, it projects a slight decline in Disney+ Core subscribers during the first quarter of 2025 compared to Q4 2024.

Disney climbed more than 4% on Friday, bringing its three-month gain to 27%. The company closed fiscal year 2024 on a high note, surpassing earnings expectations for the fourth quarter and providing an optimistic forecast for fiscal year 2025 and beyond. Moving forward, Disney's streaming business remains a central pillar of its growth strategy.

Growth Analysis

Financial Performance: In the fiscal quarter ending September 28, 2024, Disney reported revenues of $22.57 billion, reflecting a 6.28% year-over-year increase. For the full fiscal year, the company achieved annual revenues of $91.36 billion, marking a 2.77% growth.

Streaming Services: Disney's streaming division, encompassing Disney+, Hulu, and ESPN+, has shown significant progress. The direct-to-consumer segment achieved profitability with a 15% revenue increase, driven by subscriber growth and improved pricing strategies. Disney+ alone added 4.4 million new subscribers, surpassing expectations and bringing the total to 174 million.

Fundamental Analysis

Analyst Projections: Analysts forecast that Disney's earnings and revenue will grow by 19.2% and 4.3% per annum, respectively, over the next few years.

Currently, Disney trades at the upper end of its 52-week range, with analysts issuing buy signals and a forward P/E of 21.3. Analysts project steady EPS growth and anticipate the forward P/E to decline to 19.01% as earnings improve.

Disney reinstated its dividend this year after a previous suspension, though its dividend growth rate (2% annually over 20 years) remains below inflation. Valuation metrics suggest Disney is trading near fair value, with a calculated intrinsic value of $115. Analysts see a modest 7% upside, setting a price target of $125. Insider selling activity and a lack of a significant margin of safety (MOS) may deter some investors.

Valuation Concerns

• Despite recent stock price gains, valuation metrics may not fully reflect the risks associated with slower growth in key areas, such as streaming and parks.

• Investors may find better opportunities in competitors with more streamlined operations or clearer paths to profitability.

• Disney’s current valuation reflects a blend of short-term pressures and long-term potential. As the company navigates challenges in the streaming segment and economic headwinds, it may be undervalued relative to its historical performance and growth prospects.

• Double-digit EPS growth projections for FY2026 and FY2027 highlight a clear path to earnings recovery and expansion.

Market Sentiment

In mid-November, Disney disclosed that CEO Bob Iger implemented a Rule 10b5-1 trading plan to sell up to 372,412 shares, using vested stock options to acquire the shares. Such plans are designed to eliminate the appearance of insider trading by automating transactions based on preset conditions like price, volume, or timing. Iger's plan was set to expire on December 17, just before the options’ expiration on December 18.

Under the plan, Iger acquired 372,412 Disney shares at an exercise price of $92.24 per share, totaling $34.3 million. The same day, the shares were sold for an average price of $114.57 each, generating $42.7 million. Following the transactions, Iger retains ownership of 226,770 Disney shares in a personal account and 20,724 shares through a 401(k) plan.

Streaming Profitability Concerns

• Despite rapid growth in subscribers, Disney’s Direct-to-Consumer (DTC) streaming segment, including Disney+, has struggled to turn a profit due to high content production costs and fierce competition from Netflix, Amazon, and others.

• Subscriber growth has slowed, and price hikes may risk further churn, particularly in international markets.

Investment Thesis

Dividend Suspension

• Disney has not reinstated its dividend since suspending it during the pandemic, which could deter income-focused investors seeking steady returns.

High Debt Levels

• Disney's debt remains elevated following its acquisition of 21st Century Fox and significant investments in content and theme park expansion.

• Rising interest rates could increase the cost of debt servicing, potentially impacting profitability and free cash flow.

Macro Risks

• The Parks and Experiences segment is highly sensitive to economic downturns. Recession fears or inflation could reduce discretionary consumer spending on travel, leisure, and merchandise.

• Slower economic growth in international markets may also limit the company’s global expansion potential.

Content Challenges

• Declining performance of recent film releases and franchise fatigue for brands like Star Wars or Marvel could weaken Disney’s historically strong studio segment.

• The rising cost of producing blockbuster content adds to margin pressure, especially if box office results under perform.

Conclusion

Disney is a compelling investment for growth-oriented investors with a long-term horizon. While challenges remain in its streaming and parks segments, the company’s brand strength, diversified revenue base, and ongoing strategic initiatives position it well for sustainable growth. Patient investors willing to weather near-term volatility may find significant value as Disney transitions toward profitability and renewed dividend growth.