By Jack Hough
Parks, not Peltz, will power the next leg up for Walt Disney stock, argues investment bank UBS in a new analysis.
Disney's shareholder meeting this coming week will decide whether Nelson Peltz and his Trian Partners win two board seats. Peltz says he wants to unlock more free cash flow. Disney says that returned CEO Bob Iger is already doing just that. The stock price -- recently around $122 -- and Wall Street estimates have been surging.
Disney is now expected to generate $8.2 billion in free cash, up 68%, during its fiscal 2024, which runs through September. A year ago, the estimate stood at $6.4 billion. The actual number is likely to be $9 billion, reckons UBS, rising to $14 billion over the subsequent two years.
"The biggest risk in our view is potential management change, were the activists to be successful in the bid for board seats," writes UBS analyst John Hodulik in a passing mention to the proxy war. "This could cause a downturn in the shares just as the benefits of Bob Iger's latest tenure are starting to take hold."
Hodulik increased his estimate for operating profits at the parks, citing strong U.S. attendance and rising spending per visitor, despite lapping last year's 50th anniversary hoopla at Disney World. Roughly 70% of a planned $60 billion in capital investment over the next decade will go toward expanding businesses that are thriving, including $30 billion for parks and resorts, and $12 billion for cruises. Recent returns on invested capital for those businesses are about 20%.
In streaming, where Disney has reported deep losses in recent years, Hodulik expects the company to approach break-even this fiscal year and earn just over $3 billion by fiscal 2026. Disney has begun integrating Hulu into Disney+, and the two could ultimately collapse into a single service. That would bring down content spending, free the company to return to licensing some titles to third parties, and make customers more aware of time spent across both platforms, which could lower churn.
Disney's current Hulu/Disney+ bundle without ads costs customers 40 cents per hour viewed, ranking second in value behind Netflix, at 32 cents, and well ahead of Max and Paramount+, at more than 80 cents. With ads, costs fall by roughly half, but the relationship is similar.
For ESPN, Disney this year will launch a sports skinny bundle with partners Fox and Warner Bros. Discovery. This could accelerate cancellations in traditional cable if sports fans trade down to the new bundle, but Disney might be the least exposed of the bunch. Its networks in the sports bundle represent 80% of its revenue across all of its cable networks.
To hold the line, Disney would need to lure one non-cable household to its sports bundle for every 3.5 who trade down from cable -- fewer if its sports bundle cut matches the $19 a month per subscriber that it now makes across all of cable, figures UBS' Hodulik. He raised his price target for Buy-rated Disney to $140 from $120. Shares recently fetched $121.
Write to Jack Hough at jack.hough@barrons.com
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(END) Dow Jones Newswires
March 29, 2024 03:00 ET (07:00 GMT)
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