FrozenShutter
Shares of the Walt Disney Company (NYSE:DIS) have been a notable underperformer as of late. I must say that it has been a really long time ago, the matter of fact is that it has been December 2017, when I last looked at the shares. At the time, Disney announced the $66 billion deal for Twenty-First Century Fox, a deal which only closed in 2019.
That deal was designed to face the battle with upcoming Netflix (NFLX) from a position of strength. That deal was set to fortify the strategic positioning of the firm versus the likes of Netflix, while it could boost earnings power to just north of $6 per share as well, even after factoring in the dilution from the deal.
With shares trading in the low $100s at the time, I found that valuation at 18 times earnings more than sufficient, given the challenges from this competition and higher leverage following the deal with Fox.
Shares On Fire – Now Back To Earth
Ahead of the pandemic, shares of Disney rose to $105 as the company digested the deal with Fox well in 2019 and the other core businesses were doing just fine. Shares briefly fell below the $100 mark amidst the outburst of the pandemic, and essentially rose to a high of $200 in spring of 2021. Ever since, it has been all downhill from there, with shares now trading at just $95 per share, essentially marking zero capital gains over the past seven years or so.
To see how things have evolved, including the pandemic, I am going back to the fiscal results for the year 2019, ending in September of that year. The company generated nearly $70 billion in sales that year. Parks were the biggest contributor in terms of sales at $26 billion, media network revenues totaled nearly $25 billion, studio entertainment about $11 billion and the direct-to-consumer segment some $9 billion, ahead of some minor eliminations. Segment earnings of $14.8 billion turned into reported operating earnings of $13.9 billion, net earnings of $10.4 billion, and adjusted earnings of $5.76 per share.
The 2020 results were impacted in a major way by the pandemic, as they only hurt the second half of the fiscal year, of course. Media network revenues rose a solid 14% to more than $28 billion, as park revenues for the entire year were down 37% to $16.5 billion. A spectacular 81% increase in streaming service sales makes that those revenues totaled $17.0 billion, with studio entertainment down to $9.6 billion and eliminations being on the rise.
Segment profits collapsed to $8.1 billion amidst losses at the direct-to-consumer channel and losses at the park segment, as adjusted earnings were down two-thirds to $2.02 per share. Poor cash flow conversion furthermore made that net debt inched up to $40 billion.
Fast forwarding another year to the 2021 results, we see almost 3% increase in sales to $67 billion as the segment reporting has changed a bit. Park revenues were flattish amidst another year of Covid-19 but recovered in recent times, as all the other activities are now gathered under the umbrella labelled media, entertainment and distribution. Adjusted earnings improved, but only very modestly to $2.29 per share, as net debt inched lower to $38 billion.
Finally, Some Recovery
In May, Disney posted results for the first half of 2022 as revenues rose 29% to $41 billion, finally marking a real recovery from the pandemic. This came as the park business came back to life with revenues essentially doubling, accompanied by great operating leverage. The remainder of the business saw growth as well, but is facing real margin shortfalls to a minor extent at linear networks, but mostly the result of the direct-to-consumer activities.
All of this resulted in earnings essentially rising a dollar to $2.14 per share, and while they run at $4 per share (or a bit more), they still fall way short of the pre-pandemic performance. This is the result of losses at the streaming operations, but also the still lower attendance and profit numbers at the parks, among others.
In the meantime, net debt still totals $38 billion, quite a steep number, also on a relative basis, although manageable given the stability of some cash flows and Covid-19 hedge built within the company.
A Concluding Remark
The truth is that a current run rate of $4.00-$4.50 per share in profits marks a meaningful recovery from the pandemic lows, but still falls short quite a bit from pre-pandemic levels. This is partially the result of still some kind of pressure on the park business, losses at the streaming operations and general underperformance.
This kind of general underperformance is widely attributed to political involvement of top management and the company, distracting and creating a distaste with some consumers. So while the company is seeing better momentum in the first two quarters of this year, there is some soft element to the corporate performance, an issue as any renewed resurgence of Covid-19 cases across the globe could happen anytime. Furthermore, in this inflationary environment, it seems logical to expect some pressure on discretionary spending categories as well.
Still working with a $4.00-$4.50 per share run rate, valuations have been reset in quite a meaningful way, with shares now trading at a low twenty times earnings multiple, but this is based on earnings which are still far from their peak. On the other hand, there are real competitive issues at hand, as net debt is still quite elevated.
Hence, I find myself performing a balancing act as the pricing action naturally makes me upbeat. Yet, based on the fundamental performance, I still can only conclude that a neutral position is the best I can do here.
Be the first to comment