The market certainly loved the return of Bob Iger as Disney's (DIS -0.41%) interim CEO. Even activist investor Nelson Peltz jumped on board by ending his proxy fight after the entertainment giant said it would slash $5.5 billion in annual costs by the end of 2024.
Although Disney stock has given back some of the gains it made in the aftermath of the announcement, shares are still up 21% year to date, and most analysts remain upbeat about the company's future, maintaining a buy rating on the stock.
Image source: Disney.
Investors might want to be a bit more circumspect. Disney has a lot of headwinds facing it -- revenue is essentially flat, profits and margins are under pressure, it carries a massive amount of debt on its balance sheet, and cash -- though still sizable -- is slowly eroding.
It's still an entertainment powerhouse, to be sure, but let's see whether now is the time to buy.
Riding it for all its worth
Thank goodness for Disney's theme parks. While the segment represents just 37% of total revenue, it accounted for all of the entertainment company's operating income last quarter. The media segment, including streaming, which we know is still hemorrhaging red ink, contributed nothing to Disney's first-quarter performance (actually a $10 million quarterly loss).
Even last year when the division was profitable (though, again, not streaming), it only added less than 25% to total operating profits. Theme parks continue to carry the company.
That's worrisome, because if a recession does materialize this year -- and many economists suspect one will due to the Federal Reserve trying to slow down a overheated economy -- the travel and tourism industries that has been on fire could rapidly cool off.
But it comes at a cost
Having so much dependence on its theme parks makes it essentially little more than Six Flags Entertainment (SIX 1.19%) or Cedar Fair (FUN 1.53%), but at an enormously inflated valuation. Where Disney goes for almost 20 times next year's earnings, twice its sales, and exponential multiples of its free cash flow, Six Flags and Cedar Fair are much more affordable stocks.
|
Stock |
Price-to-Earnings |
Forward PE |
Price-to-Sales |
Price-to-Cash |
Price-to-FCF |
|---|---|---|---|---|---|
|
Disney |
57.9 |
19.1 |
2.3 |
22.8 |
2056.7 |
|
Six Flags |
8.3 |
13.6 |
1.4 |
8.5 |
9.0 |
|
Cedar Fair |
24.9 |
15.5 |
1.7 |
32.9 |
28.5 |
Data source: FinViz.com. Table by author.
You could argue that if you're just comparing theme parks, then you're also getting broadcast TV, streaming, movie studios, and retail all thrown in for free. True -- but they are more of a mixed bag rather than a pure benefit.
Carrying a heavy load
Iger promises a lot. ESPN is strong, streaming will turn profitable, and the dividend may be back by the end of the year, though at a much smaller rate than before the payment was suspended after 57 years.
Not that the cost-cutting plan isn't necessary: 7,000 employees are losing their jobs, and even Hulu may be on the chopping block, though this would be a smarter move than having to buy out Comcast's (NASDAQ: CMCSA) ownership stake. Disney is still a bloated operation, though.
It overpaid for some acquisitions, especially 21st Century Fo. Peltz blames the Fox deal for most of Disney's woes, including long-term debt of $45 billion. Other long long-term borrowings stand above $12 billion, with $3.2 billion in current payments due on that debt. Cash, though, has dropped from $11.6 billion to $8.5 billion. And Disney wants to throw the dividend back into the mix even as its free cash flow dwindles.
Disney's not going bankrupt, but it's not exactly agile either.
Image source: Disney.
Can Iger thread the needle?
Wall Street is modeling 20% earnings growth for the next five years, which seems very optimistic, particularly considering profits contracted over the past five years (though the pandemic was a big cause of that).
At nearly three times that projected earnings growth rate, it's charitable to call Disney fairly priced, and more realistic to say it is overpriced. The parks need to continue growing as they are; streaming needs to be profitable, which is not assured; and the company needs to hit its cost-cutting objectives on time, which companies rarely are able to do.
Everything in Iger's cost-cutting plan needs to function like a Swiss watch, and even then Disney stock can't be considered a "good" value.
Investors should use caution when approaching Disney stock here. There's a long-term case to be made for buying this entertainment stock, but it seems an investor could wait for a better price that will surely come to achieve those potential gains.
