Disney (NYSE:DIS) is among the American business giants that have had the most difficult time recovering from lockdowns and closures a few years ago. With theme park visits disrupted and fewer consumers attending movies in theaters, the entertainment giant has struggled to regain its footing and traction.
To help secure traction once again, former CEO Bob Iger came back and assumed the top position once. Famously, he had guided the company through one of the most successful phases of its history.
Investors are starting to see results from this positive leadership change, with DIS share price up significantly over the past month or so. But there’s more to the story than just a management change. Here’s why Disney has been climbing higher.
Why Is Disney Stock Going Up?
In a nutshell, Disney stock has been going up as a result of higher earnings and upbeat forecasts for future profitability.
In its most recent Q4 and full-year earnings report, management outlined full-year revenue growth of 7% driven primarily by an ongoing rebound in the theme parks and experiences division.
Earnings per share for the full year totaled $1.29, down from $1.75 in 2022. Although earnings were lower this year, the numbers are up substantially following a loss of $0.25 per share in the prior quarter that resulted from ongoing restructuring costs as Iger institutes more efficient operations.
Disney’s Experiences division, which includes theme parks, saw 30% year-over-year operating income growth. Impressively, Disney enjoyed growth in all of its parks over the past year, signaling the resurgence in travel demand is likely to remain going forward.
Another key area of improvement for Disney+ was its streaming service. After losing 11.7 million subscribers in the previous quarter, the service added 7 million new users. Disney’s streaming business is expected to become profitable toward the end of next year.
Analysts are buoyant on streaming becoming a large contributor to earnings growth down the line, though profitability could be rocky for the first several quarters after breaking even.
In addition to the boost from a relatively positive earnings report, Disney investors also have cause for long-term optimism. Over the next five years, the company’s earnings are expected to grow at a compounded annual rate of about 16%. The success of DIS share price will likely be tied to that number.
Will Disney Share Price Keep Rising?
Analysts expect reasonably strong returns from Disney over the coming 12 months with a median target of $106.95 signifying as much as 12.1% upside.
Approximately two thirds of analysts rate the stock as a Buy, with 22 of the 33 in total assessing it as such.
Turning to valuation, Disney trades at 20.5x forward earnings and 1.9x sales. While these ratios are roughly in line with many other blue-chip companies at the moment, Disney’s price-to-cash-flow ratio of 14.1x is attractive.
Free cash flow is nearing levels not seen since the turn of the decade and is still rising, suggesting that Disney’s stock has many of the hallmarks needed to recover as business normalizes.
What Disney Shareholders Need to Watch
It’s not all roses for Disney and one major concern stems from legacy TV stations, such as ABC, which is sledding uphill.
In the most recent quarter, revenue from linear networks contracted by 9% compared to the same quarter a year ago. Iger is reportedly looking for a buyer for ABC, but investors may see further revenue losses in this area until Disney can offload its legacy TV portfolio.
As the macro environments runs into choppy waters, expect theme parks and cruise experiences to slow also. With Americans burning through savings, budgets for travel, theme parks and even streaming subscriptions in 2024 may be tighter.
So, while Disney has a wide enough moat to fly through short-term turbulence, slower growth and even a reversal in earnings are horizon risks for new shareholders.
Another cause for concern to keep buyers up at night is the underwhelming performance of box office releases. The recent superhero film “The Marvels,” for example, brought in just $47 million in box office receipts on its opening weekend, a record low for the Marvel superhero franchise and an illustration of the increasing franchise fatigue that Disney seems to be facing.
With production budgets higher than ever before, Disney must restore viewer enthusiasm for its movies if it wants to regain its longstanding box office dominance.
Is Disney Stock a Buy?
Despite its recent struggles, Disney remains a dominant entertainment company with a valuable set of intellectual properties, a leading streaming service and a world-class theme park business.
The moat that the company enjoys, combined with the veteran leadership of Bob Iger, will likely be sufficient to turn media giant around and restore it to solid, stable performance.
It’s also worth noting that Wall Street has taken advantage of this year’s lower prices to buy up Disney shares at a discount. Over the last 12 months, institutional buyers have picked up almost $60 billion worth of Disney.
By contrast, institutional selling over the same period amounted to just $10.5 billion. This enormous disparity between buying and selling on Wall Street suggests that large investors are still quite bullish.
With that said, investors who buy Disney may face near-term volatility. The company’s net margin over the past year has been a rather thin 2.7%. Even with Iger’s initiatives showing early signs of success, macroeconomic conditions, slower streaming growth or further box office flops could push the company back into the red in future quarters. The long-term view for Disney, however, remains quite optimistic.
For value investors who are willing to stomach a little volatility in the near-term, Disney offers tremendous potential in the medium term and long-term.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.