Share prices of Walt Disney (DIS -0.04%) have staged a partial recovery over the past few months, although the entertainment juggernaut still faces myriad challenges. Given the stock movement, UBS issued updated guidance Wednesday morning, maintaining its optimism on the stock and reiterating its buy rating. It boosted its price target to $140. That new price target represents an upside over the next 12 months or so of about 15%.
Free cash flow growth
UBS said it is confident that Disney can drive free cash flow generation higher over the next few years. Driving the price target bump is the expectation that Disney will produce $9 billion in free cash flow this year and $14 billion in free cash flow in 2026. This will allow the company to raise its dividend, buy back shares, and make growth investments.
Hitting those targets will require some heavy lifting on Disney's part. The company still depends on its linear TV business for a big chunk of its profits, and its film studio business has been struggling with lackluster releases. Disney's Marvel movies used to be a sure thing, but that's no longer the case.
Disney has made good progress boosting profitability in its streaming business, although subscriber growth has slowed dramatically. The streaming business generated $6.1 billion of revenue in the latest quarter along with an operating loss of $216 million. To grow its free cash flow over the next few years, Disney will need to grow streaming profits quickly enough to offset profit declines elsewhere.
Don't underestimate Disney
While Disney is in turnaround mode, UBS' optimism isn't misplaced. The company owns a collection of assets that's tough to beat, and even though parts of its business are struggling, the classic Disney flywheel is still intact.
A free cash flow of $14 billion would put the price-to-free cash flow ratio at about 16, not an unreasonable valuation for the iconic entertainment company. While the company's short-term results may be messy, Disney stock looks like a solid long-term investment.
