Disney (DIS 0.18%) stock has not fared so well as the economy adjusts to inflation and the pandemic's current phase. Shares have been clobbered 33% in 2022 thanks to the bear market, hastened by aggressive U.S. Federal Reserve interest rate hikes to try and cool inflation.
After a brief rally following the last earnings update in August, Disney shares are back down to where they were in the summer of 2020.
The business is far from perfect, but the sell-off looks overdone. Disney stock looks like a top buy to me right now.
A little magic in store for content releases
Let's start with the streaming business. Disney+, Hulu, and ESPN+ collectively had more than 221 million paid subscribers (152 million of those Disney+ and the Disney+ Hotstar international offering) at the beginning of July 2022. Disney had a lot of success increasing subscriber counts at Hulu by introducing advertising supported tiers, and the same model is about to be replicated for Disney+.
In December, Disney+ with no ads will go from $7.99 a month to $10.99 a month. A new ad-supported tier will debut at $7.99 a month, to essentially keep entry-level tier pricing the same. Other adjustments have been made to bundle packages with Hulu and ESPN+ to increase options for consumers, but CEO Bob Chapek has said the addition of ads won't make streaming profitable by itself. Rather, the goal is still to keep ramping up total subscribers, with the outlook for fiscal 2024 forecasting 230 million to 260 million Disney+ and Disney+ Hotstar subscribers.
As a reminder, Disney's "direct-to-consumer" segment (which houses the streaming services) generated an operating loss of $2.54 billion through the first nine months of fiscal 2022. Disney has said this year will likely be the trough for those losses as it continues to expand its subscriber base.
Now that the filming studios are operating again, a steady slate of content is being released to keep households engaged. The same goes for theatrical releases. Ending a long theater drought after Thor: Love and Thunder was released in July, the Marvel studio is set to release the second Black Panther movie in November. That will be followed by the Avatar movie sequel -- a decade and a half in the making -- in December.
Moviegoers have continued to show their desire for blockbusters. Over in the other superhero universe camp, DC's Black Adam (part of Warner Bros Discovery) posted a $67 million opening weekend at the U.S. box office, despite getting mediocre reviews. Disney could see similar big draws to local theaters with its two upcoming releases, which would provide a big financial boost to its media and entertainment segment (operating income of $4.13 billion so far in 2022, down 35% year-over-year).
In the meantime, Disney parks...
While waiting for streaming and film distribution businesses to fully realize their potential, some Disney theme parks are firing on all cylinders again.
Domestically, the Magic Kingdom's management team said per-guest spending was as much as 40% higher than in 2019. Disneyland Paris revenue and profits also started to exceed 2019 levels. The Shanghai Disney Resort continues to drag on results due to pandemic lockdowns.
Nevertheless, Disney theme parks are highly profitable again and paying the bills. Operating income for the segment was $6.39 billion in the first three-quarters of 2022, compared to an operating loss of $169 million the same period in 2021. There's a good chance this elevated consumer spending will eventually wear off, especially with the Fed trying to tamp down economic activity.
But at this point, all signs point to Disney parks doing well. Airlines are a good indicator here. Late summer and early fall earnings have been strong, and bookings for the fourth quarter of 2022 point to plenty of consumer travel demand.
Of course, even after getting knocked down this year, Disney stock isn't cheap. Shares trade for an elevated 61 times trailing 12-month earning per share. But as the company continues to lap depressed financials from 2021, this premium will lessen. In fact, based on one-year-forward earnings expectations, Disney trades for 16 times earnings.
I'm not ready to be quite so optimistic about fiscal 2023 earnings expectations before Mickey and company provide a preliminary outlook. However, if the streaming business's losses begin to improve next year, box office sales rally, and theme parks (as well as the sleepy traditional TV networks) hold strong, I do expect to see a big jump in earnings next year.
All told, I see the most recent sell-off reflecting extreme pessimism about the economy, though consumers have been quite resilient. Disney tops my list of travel and entertainment stocks right now.
