Amid the entertainment industry’s ongoing recovery, some companies have shown solid growth prospects. Garnering significant investor attention at the moment are The Walt Disney Company (NYSE:DIS) and Carnival Corporation & plc (NYSE:CCL), but are they worth buying?
The Case for Disney (DIS) Stock
The House of Mouse has been gaining traction lately following the challenging last year. The momentum took off as the company posted a strong earnings report, boosting investor sentiment.
Disney shares have gained more than 25% year to date and hit its 52-week high of $115.19 on March 5. This is a significant turnaround from last year when the stock significantly underperformed the broader market.
Last year, the entertainment giant was in distress, facing waning momentum, a declining subscriber base, and box office weakness. The company’s streaming business, which had high hopes of gaining market dominance, felt the churn of becoming unprofitable.
Disney+’s core subscribers fell by 1.3 million sequentially in the last reported quarter, mainly due to price increases. However, Disney+’s Core ARPU grew by $0.14 sequentially.
The company sought layoffs and cost-cutting measures to stabilize its business model. Moreover, it is preparing to crack down on password sharing, which can be a boon for the company after the initial decline in user base seen when Netflix, Inc. (NASDAQ:NFLX) implemented this strategy.
Disney expects to turn profitable with its combined streaming businesses in the fourth quarter of fiscal 2024. Also, it hopes to add around 5.5 to 6 million Disney+ core subscribers in the second quarter.
Although there was a user decline in the fiscal first quarter ended December 2023, overall business improvement is evident.
Disney is making significant improvements through its cost-cutting initiatives and seems to be on track to meet or exceed its $7.5 billion cost savings goal in this fiscal year.
Revenues Flat But Profits Soar
For the fiscal first quarter of 2024, Disney reported revenue of $23.55 billion, almost unchanged from the prior-year quarter’s $23.51 billion. However, its non-GAAP EPS was $1.22 higher than the $0.99 reported in the year-ago period. The company expects full-year fiscal 2024 non-GAAP EPS to rise by around 20% year-over-year to $4.60.
Disney has a diversified business across entertainment, sports and experiences. While in the entertainment segment, revenues fell 7% year-over-year to $9.98 billion, amid waning sales in linear networks and content and licensing fees, its direct-to-consumer business grew 15% year-over-year to $5.55 billion.
In Sports, ESPN revenues grew 4% year-over-year to $4.84 billion.
The company seems to be staging a comeback with record revenues and operating margin in its Experiences segment, which includes its resorts and theme parks, despite lower footfall.
On the other hand, Disney’s sports venture is gearing up to launch its flagship streaming service through ESPN in the fall of 2025. The company is trying to boost ESPN’s business, which has been under pressure due to declining customer numbers.
There’s no denying that the entertainment giant has been struggling lately to find business stability. However, its brand popularity, reach, and strategic moves should help the company soon get back on track.
Disney Still Rules, Despite Setbacks
Disney’s popularity of characters and unmatched range of franchises and content are expected to keep demand for its streaming platforms high. Moreover, its Experiences business will remain a significant revenue driver as the Magic Kingdom allures people from around the world.
The company has ruled the entertainment space for decades and looks poised to remain a prominent name in the industry for the coming decades despite rising competition.
In addition, Disney is planning to boost shareholders’ returns through a new share repurchase program targeting $3 billion in repurchases in fiscal 2024. The company also declared a 50% hike over the last dividend paid. The revised dividend of $0.45 per share is payable on July 25, 2024.
The stock is currently trading at 24.48 times non-GAAP forward earnings. While this valuation looks expensive compared to its industry peers, it indicates more than a 40% discount to its 5-year average of 42.55. Moreover, its solid growth prospects justify the current valuation.
While the average analyst price target of $117.70 indicates a modest upside potential of 3.4% from the current price level, analysts look highly bullish about the stock’s prospects. Of the 26 analysts covering the stock, 18 recommend buying it.
As the company’s business improves, there is good reason to believe the stock will prosper and produce generous returns for investors.
The Bull Case for Carnival
Subsequent to the lockdown struggles from a few years ago, cruise operators have seen robust bookings over the past several months. While massive debt accumulation led to cruise operator shares witnessing a free fall, many are now making a solid comeback.
As the leading cruise operator with a dominating market share, Carnival witnessed massive revenue declines during those testy years amid lower demand and concerns over the impact of high rates.
However, strengthening demand helped the company reach historical occupancy levels in the second half of 2023. During Black Friday and Cyber Monday, the cruise operator saw an all-time high in booking volumes. Moreover, the company’s total customer deposits surpassed the previous records for each quarter last year.
Carnival ended last year in the “best booked position” in terms of price and occupancy. The company expects to see continued momentum in bookings this year and occupancy at historical levels amid the overall strength in the cruise industry.
Industry analysts believe bookings in 2024 will be at record levels, even eclipsing numbers from 2019. This year, there could be 35.7 million travelers compared to 31.5 million in 2023. This also indicates a 6% increase from record levels seen before lockdowns.
Carnival Already Up 85%
The steady recovery led to Carnival’s stock gaining more than 85% over the past year. The price momentum is likely to be sustained in the near term, thanks to elevated vacation spending and anticipations of the Fed cutting rates this year.
During the fiscal fourth quarter, which ended November 2023, Carnival recorded revenues of $5.40 billion with record net per diems that topped 2019 levels.
Revenue growth was 40.6% year over year. Full-year revenues also grew significantly, hitting an all-time high of $21.59 billion. While Carnival’s quarterly bottom line is still in the red, it achieved a positive adjusted net income of $1 million for the year, surpassing its guidance.
In addition, the company significantly improved its debt position, paying $6 billion to reduce its debt balance from the highs seen at the beginning of 2023. Carnival ended the year with $5.4 billion of liquidity.
The cruise industry is currently bubbling with positive sentiments. According to Goldman Sachs analyst Lizzie Dove, the bull run for cruise stocks is not over yet, as favorable demand conditions amid short supply should help improve prices. The analyst has, in fact, initiated a Buy rating for Carnival.
Carnival’s newfound strength in business is raising optimism. Of the 22 analysts rating the stock, 16 recommend buying it. In addition, the median price target of $21.32 indicates a 31.7% upside potential.
Despite the stock’s massive rally over the past year, it is trading just 0.83 times forward sales, which is pretty reasonable compared to the industry standards. Moreover, this valuation represents about a 70% discount to the 5-year average of 2.73.
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