The Walt Disney Company

Weekly Valuation  — Valutico | 27June 2022

Full valuation: click here




— Disney’s near-term outlook is uncertain.

— It may take years for Disney to return to full strength.

— The company is laying the groundwork now to grow aggressively during the next ten years.


The stock market has had a difficult six months, with the Nasdaq Composite down about 22%, the S&P 500 down 11% and the Dow Jones Industrial Average down 7%. However, these declines are nothing compared to what many individual stocks have gone through. In six months, Walt Disney’s stock has lost over 28% of its value and is down about 47% from its all-time high in March 2021.


Historically investors have been able to rely on Disney’s dividends, even during tumultuous times such as these. However, the company has shown no intention of reinstating the semi-annual payout since it was cut in 2020. This makes Disney one of only three Dow stocks, along with Boeing and Salesforce, that do not pay a dividend.


Despite the slide in Disney’s stock and the absence of a dividend, there is reason to believe the company is trading at a fair price. 


Changing perspectives

In the short term, the stock market can be extremely volatile but in general there are valid reasons why stocks rise or fall. To understand why Disney stock can fall so far even though the company is doing better today than it was a year or two ago, it’s best to put yourself in the shoes of a short-term trader. 


Short-term headwinds 

Disney’s short-term outlook from an operational perspective is rather negative What’s more, Disney is struggling with political tensions in Florida where the state has decided to revoke certain special tax privileges that it has enjoyed for decades.


Netflix reported subscriber losses in its most recent quarter, raising the question of whether it’s worth investing in as competition gets tougher. The long-term profitability of Disney+ is uncertain, although the company is expected to break even by 2024. Disney is spending $32 billion on content in fiscal 2022, which could come back to haunt it in an economic downturn or recession.


The company has invested heavily, hoping to land several blockbuster hits. The lockdowns in China have, however, already taken away some of the streaming revenue and the numbers could be lower than expected if the general economic situation worsens.


Disney’s theme park business depends on discretionary spending and consumer health and is historically vulnerable to recession.


Add it all up, and it’s easy to see why short-term investors should stay away from or bet against Disney stock.


Maintain a long-term mindset

As bad as the short-term outlook may be, long-term investors have the opportunity to buy Disney stock at a price that is roughly the same as it was five years ago. As a stock, Disney may seem less attractive because of its high expenses and lack of dividend. But as a company, Disney is saving nearly $3 billion a year by not paying a dividend.


Disney reported a $1.48 billion operating loss in its direct-to-consumer (DTC) segment in the first half of fiscal 2022, which happens to be about what the company would have spent on its dividend. So by not paying a dividend, Disney can afford its DTC losses.


In the long run, Disney plans to make its DTC segment profitable. The idea is that over time, subscribers to Disney+, ESPN+ and Hulu will expand Disney’s global reach and increase consumer touch points, leading to more interaction. The streaming services could contribute to more visits to the cinema, parks, cruises, etc.


Valuation analysis

From a short-term investor’s perspective, Disney stock doesn’t look that great. But from the perspective of an investor who cares more about the next decade than the next quarter, the media company is well positioned to add a new revenue stream and break its box office and park attendance records over time. With the stock plummeting and falling out of favour, now could be an excellent time to buy Disney stock.


While the market is pricing the company at a multiple valuation of between USD 110 and 160billion, our Flow-to-Equity analysis delivers a valuation of around USD 241 billion. The latter is based on a Cost of Equity of 7.4%, which is driven by a levered beta of 0.88 and a risk-free rate of 3.3%. We draw a consensus that Disney is currently fairly valued. The aforementioned aspects could still offer a lot of upside potential, but should be viewed with caution in the current market and competitive situation.

Full valuation: click here



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