When it comes to Walt Disney (DIS -0.04%) as an investment these days it appears to be a Country Bear Jamboree. The boo birds are everywhere, driving the stock to a nine-year low earlier this month. Short interest is in its historical range, but the stock chart shows that bulls are in short supply.
It's just a matter of time before sentiment changes. You can't keep the House of Mouse in the doghouse forever. This could very well be the start of a new bull market for Disney stock. Let's go over a few of the reasons why better days could be ahead for the entertainment giant and its shareholders.
1. Asset sales are coming
Disney has been talking up a willingness to part with noncore assets, but there's been a lack of actual transactions announced so far. This could change soon. Bloomberg reported this week that Reliance Industries is closing in on a multibillion-dollar cash and stock deal to acquire a controlling stake in Disney's India streaming operations. Sources tell Bloomberg that a deal could be announced as early as next month. Spoiler alert: Disney reports its fiscal fourth-quarter results on Nov. 8.
Mickey Mouse has a sizable audience in the populous nation. India's Disney+ Hotstar accounts for 40.4 million of the 146.1 million Disney+ subscribers worldwide. However, the average subscriber in India is generating $0.59 a month in revenue, compared to $6.58 -- and rising -- everywhere else.
Finding an outright buyer or at least a majority stakeholder for Disney's operations in India would likely be applauded by investors. It would pivot the focus back to its more lucrative streaming operations that Disney expects to turn profitable in the new fiscal year that began earlier this month. Throw in a few deals closer to home for some of Disney's languishing media networks and other businesses and the market may view Disney as a growth stock again. With a proxy battle potentially brewing in the coming months, expect Disney to pick up the pace on potential transactions.
Image source: Disney.
2. Theme parks are doing better than you think
One of Disney's most resilient businesses has been its theme park operations. The segment is generating record revenue and operating profits, even if the turnstile clicks aren't as high as they were before the pandemic. The game changer for Disney has been that it's been able to hike prices and introduce new premium offerings. The average day guest is generating roughly 40% more revenue these days than a pre-pandemic visitor.
The business should get even stronger in the coming months. Disney just increased prices for admissions to Disney World and Disneyland. In the next two months it's introducing entire new lands for its parks in Hong Kong and Shanghai where it has a substantial minority stake. It's not a surprise that Disney recently announced that it was ramping up its theme park and cruise line investments in the next decade, in a time where it's cutting costs elsewhere. There may come a time when Disney aims too high with its pricing gun, but for now it's more of an opportunity than a challenge.
3. Fiscal prudence will start to show up on the bottom line
Inflation is everywhere across Disney's businesses. It's not just the theme parks becoming more expensive. Monthly subscriptions for ESPN+ and the commercials-free version of Hulu and Disney+ moved 10% to 27% higher this month. This is all happening at a time when CEO Bob Iger is paring back the media company's overhead.
Disney expects to trim more than $5.5 billion in annual overhead by the end of next year. Investors should start seeing the benefit of improving margins in the next few quarters. Analysts see revenue growing just 5% in fiscal 2024, but they see adjusted earnings per share rising 29% along the way. With Disney in a good position to exceed Wall Street profit forecasts as it moves some prices higher and slashes expenses it won't be long before the bulls chase the bears away.
