It's been more than three months since shares of Walt Disney (DIS -0.12%) closed in the double digits. "Can Disney stock stay above $100 this time?" I wondered then. So far, so buoyant, but with the media giant's shares drifting back to the century mark, it's a matter worth revisiting.
If Disney buckles below $100 again, is it a buying opportunity or a red flag? The stock is still beating the market this year with its 14% gain through Tuesday's close. However, after three straight years of losing to the market, you can't blame Disney investors for being worried.
I'm not a worried Disney investor. Let me dive into the reasons why I would approach a continued pullback as a buying opportunity.
You call this an upgrade?
There was an unusual Disney upgrade earlier this week. Hamilton Faber at Redburn Atlantic boosted his rating on the stock, but it didn't really move the shares. It's easy to see why the market didn't react. Faber is simply going from sell to neutral, so it's not a rousing endorsement. Sticking with a $100 price target is also just 3% below where the shares are now, so it's not a rousing rallying point for the bears.
The analyst's concerns remain the same as they were before. Legacy media companies continue to struggle as the popularity of cable and satellite television platforms continues to fade. Disney and other media heavyweights are making big bets on the growing streaming market, but will it ever be as lucrative as the pay TV pasture they are being forced to leave behind?
Faber's upgrade is more the handiwork of the stock sliding in recent weeks than his forward assumptions changing. There is still hope for Disney bulls out there.
Image source: Disney.
A whole new world
A lot is riding on Disney's push into streaming. It is paying off. If you focus only on its fading linear networks and growing streaming business, you get a fairly upbeat snapshot. There was a 13% increase for Disney's direct-to-consumer streaming platforms in its latest quarter. It was more than enough to offset an 8% slide in its legacy networks business. Back out the poor performance of its movie studio, and the segment's top-line result goes from a decline of 5% to a gain of 5% in the fiscal second quarter.
The news gets even better on the bottom line. Disney surprised the market by reporting its first operating profit for its streaming business. The $799 million operating profit it posted for its linear networks and streaming business combined in its latest quarter more than doubled the $372 million operating profit the two segments delivered a year earlier. Disney warned that it would likely dip back into the red for its direct-to-consumer business in the current quarter, but it continues to see streaming turning consistently profitable by the end of the fiscal year that ends in September.
Even the brutal past year that Disney has had at the box office is likely to improve dramatically in the coming months. This month's Kingdom of the Planet of the Apes just became Disney's first release since June of last year to top $100 million in domestic box office receipts. It has fared even better overseas. There is at least one potential blockbuster on Disney's slate every month through the end of the fiscal year, and fiscal 2025 is shaping up to be even stronger.
Disney's theme parks also continue to draw large crowds generating record per-capita revenue, but that's not a surprise. It's been the steadiest of Disney's businesses on this side of the pandemic. The profitability of its streaming business and the return to multiplex dominance are just two catalysts that will add to the overall success of the leading entertainment stock.
Perhaps the best reason to approach any weakness in the stock as a buying opportunity is that the fundamentals are improving even as the shares are sinking. Disney stock has declined over the past three months, but the same can't be said for Wall Street profit targets. Analysts see Disney posting per-share earnings of $4.73 in fiscal 2024 and $5.46 next year, up from $4.29 and $5.04 three months earlier, respectively.
Disney is now trading for 22 times this year's profit target and 19 times next year's multiple, and those estimates keep inching higher. If the stock keeps heading lower as its prospects climb higher, it seems to be more of an opportunity than a problem.
