Stock of the week - Walt Disney (09.11.2023)

13:36 9 November 2023
  • Walt Disney gains 4% in premarket
  • Company reported fiscal-Q4 2023 earnings yesterday
  • Sales missed expectations but earnings beat forecasts
  • Streaming business with a $2.6 billion full-year loss
  • Company expects its streaming business to turn profitable
  • Hollywood studios reach tentative agreement with actors
  • A look at the valuation

Walt Disney (DIS.US) is trading higher in premarket today, following the release of fiscal-Q4 2023 earnings report. Headline results turned out to be mixed with sales disappointing and profits beating expectations. The biggest positive surprise came from subscriber numbers. Let's take a quick look at the release as well as other recent news related to Disney!

Profits beat while sales miss expectations

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Walt Disney reported fiscal-Q4 2023 (calendar Q3 2023) yesterday after the close of the Wall Street session. Headline results were mixed with revenue missing expectations slightly and profit coming much above expectations. An over-80% jump in operating profit was driven by better-than-expected performance in all three business segments. Interestingly, Sports was the only segment that managed to beat revenue expectations as Entertainment and Experiences missed. Disney announced that it will increase its cost-cutting measures by an additional $2 billion, bringing a cost-cutting target to $7.5 billion.

The biggest positive surprise in Walt Disney's earnings came from Disney+ subscriber numbers. While total Disney+ subscribers dropped 8.5% YoY to 150.2 million, analysts expected a deeper, almost-10% drop. However, 150.2 million Disney+ subscribers at the end of fiscal-Q4 means that company added 7 million new subscribers compared to the end of fiscal-Q3. On the other hand, subscriber numbers in ESPN+ and Hulu were slightly lower than expected. 

Fiscal-Q4 2023 earnings

  • Revenue: $21.24 billion vs $21.33 billion expected (+5.4% YoY)
    • Entertainment: $9.52 billion vs $9.77 billion expected
    • Sports: $3.91 billion vs $3.89 billion expected
    • Experiences: $8.16 billion vs $8.20 billion expected
  • Segment operating profit: $2.98 billion vs $2.62 billion expected (+86% YoY)
    • Entertainment: $236 million vs $164.8 million expected
    • Sports: $981 million vs $840.5 million expected
    • Experiences: $1.76 billion vs $1.62 billion expected
  • Disney+ subscribers: 150.2 million vs 148.15 million (-8.5% YoY)
  • ESPN+ subscribers: 26 million vs 26.3 million expected (+7% YoY)
  • Live TV subscribers: 4.6 million vs 4.57 million expected (+4.5% YoY)
  • Total Hulu subscribers: 48.5 million vs 49.2 million expected (+2.75%)
  • Adjusted EPS: $0.82 vs $0.70 expected ($0.30 a year ago)

Disney's streaming business still generates losses

While Disney's streaming business is massive, it should be said that it is still generating losses. However, some progress can be spotted in the field. Company booked a $2.6 billion loss on its streaming business in full fiscal-2023. While this looks massive, it is a significant improvement compared to an around $4 billion loss on streaming the company booked in fiscal-2022. Moreover, Walt Disney reaffirmed its commitment to turn its streaming business profitable by fiscal-Q4 2024.

Hollywood studios reach tentative agreement to end strikes

It should be said that there are also other factors influencing today's premarket gain of Walt Disney. It was reported that Hollywood studios and unions representing around 160 thousand actors have reached a tentative agreement to end the ongoing strike. The agreement is worth over $1 billion and is said to include performance-based bonuses paid by streaming companies as well as restrictions on recreating actor's likeness with AI, among others. While settlement with actors' unions is likely to mean higher expenses for Hollywood studios, lack of agreement would continue to halt production. Given that studios have already reached an agreement with writers, agreement with actors would pave the way for resumption of content production. 

Valuation

Let's take a quick look at Walt Disney's valuation with 2 often used valuation methods - DCF and multiples. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

As Walt Disney stopped paying dividends in 2019 and made no announcement on resumption of these payouts, the company cannot be valued using Gordon Growth Model, which we often used in our previous Stock of the Week posts.

Discounted Cash Flow method

Firstly, let's take a look at Walt Disney's valuation with one of the most popular fundamental models - Discounted Cash Flow method (DCF). This model relies on a number of assumptions and we have decided to base those around 5-year averages. Forecasts for 10 years were made with terminal value assumptions being 3% terminal revenue growth and 8% weighted average cost of capital (WACC). Running the model with these assumptions leads us to an intrinsic price per Walt Disney share of $128.58 - or over 50% above yesterday's closing price.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples

Next, let's take a look at how Walt Disney's valuation compares with peers. We have created a peer group consisting of  Paramount Global (PARA.US), Warner Bros Discovery (WBD.US), Comcast (CMCSA.US) and FOX Corp (FOXA.US) - Walt Disney's key US competitors in the Film & TV business. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA. We have decided to use medians in calculating valuations.

As one can see in the table below, Disney's valuations obtained this way range from $16.89 in case of P/FCF to $67.08 in case of EV/EBITDA. A key point to note is that each of those valuations is below the current market price of Disney's shares ($84.50)! Taking a trimmed median of 6 valuations (excluding the highest and the lowest ones) leads us to an intrinsic value per Walt Disney's share of $46.51 - or around 45% below current market price!

Source: Bloomberg Finance LP, XTB Research

A look at the chart

Walt Disney (DIS.US) is trading over 4% higher in premarket today. Taking a look at the chart at D1 interval, we can see that current premarket quotes suggest the stock will launch today's cash trading above $85.50 resistance zone, that has limited upwards moves recently. A textbook range of the upside breakout from a recent sideways move suggests a possibility of share price moving to as high as $93 area. However, in order to reach this area, bulls would need to break through a key resistance zone in the $92 area, marked with 200-session moving average, the upper limit of the Overbalance structure as well as the 38.2% retracement of the downward move launched at the turn of 2022 and 2023. A break above this mix of technical levels would hint, at least in theory, at a trend reversal.

Source: xStation5

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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