Good investing decisions often feel terrifying in the short term. Months or sometimes years later, you're proven right or wrong. What feels "safe" is often the herd's consensus, and it's hard to outperform that approach when you're part of it.
The consensus around The Walt Disney Company (DIS 0.77%) is that nobody wants to own it -- and that is understandable. The company has dealt with challenges from COVID-19, investors souring on streaming, and a political storm in the state of Florida. The stock has been down nearly 40% over the past year.
So here's the question for investors: Is Disney a good stock with some negative headlines or a company on the brink of ruin? You won't know for sure until sometime in the future, but here is why I like the stock today and moving forward.
The parks are waking up
Disney's "Parks and Experiences" segment is a cash cow for the business; it contributed $6.7 billion (or 45%) of Disney's $14.8 billion of operating profits in 2019, the year before COVID-19. That virtually went to zero during the pandemic when lockdowns and health concerns kept people out of the parks.
However, the company's earnings for the quarter ended January 1st, 2022, have shown that parks are starting to come alive again. Operating income from that segment was $2.4 billion for the quarter, up from a loss of $119 million in 2021. Investors will want to look for progress when the company reports its second-quarter 2022 earnings.
You can see in the above chart what COVID-19 has done to the company's free cash flow. Getting the parks back to full speed would be a welcome development and go a long way in bringing Disney's cash flow back to pre-pandemic levels.
Strong streaming momentum
In recent years, the streaming space has become immensely competitive. First-mover Netflix could be considered a bellwether by some. The company has experienced a dramatic slowdown in subscriber growth that has ruffled investor feathers, seemingly dragging down sentiment on other companies, Disney included.
What Netflix is going through doesn't seem to be impacting Disney; in fact, some of Netflix's struggles may be due to Disney's success. Disney operates various streaming services -- primarily Disney+, ESPN+, and Hulu -- and it generates revenue from subscriptions and ads.
Most importantly, membership is growing just fine so far. There are now 196.4 million subscribers across these three platforms as of the first quarter, up from 179 million the prior quarter. The year-over-year increase is 34%; meanwhile, Netflix's most recent quarter showed it lost subscribers for the first time in 10 years.
Pessimism seems priced into the stock
Investors have shunned Disney; the stock is now down almost 40% over the past year. Yes, Disney is widely considered a blue-chip stock and is a member of the Dow Jones, an index of just 30 large American companies. A 40% decline is not something you see every day.
But with parks and streaming trending in the right direction, the decline looks more like an opportunity for long-term investors willing to wait out the storm. The earnings power of Disney was crushed over the past few years, making valuing the stock difficult. Earnings per share (EPS) was $8.36 in 2018; had the business performed at that level today, the stock's price-to-earnings ratio would be just 13.
However, as discussed above, the business is on a road to recovery from COVID-19. Analysts see earnings ramping up over the next several years, estimating 2024 EPS at $6.65, or a forward P/E ratio of 17.
Disney seems to have a bright future; it has world-class intellectual property that fuels its parks and streaming businesses -- and both have been coming on strong in recent months. But don't buy Disney assuming the payoff will be quick. It could be a multi-year turnaround story for the company, though I think it will reward shareholders in the long run.