Walt Disney Stock Up 40% In 3 Years; Can The Momentum Continue?

Walt Disney (NYSE: DIS) stock price has jumped over 40% from $96 in August 2016 to $135 in August 2019. The increase in Walt Disney stock price was primarily driven by an increase in revenue and margins, along with a sharp drop of 202 million in shares outstanding which has pushed up the earnings per share. However, this momentum was partially offset by a reduction of 10.9x in the P/E multiple during this period. Despite recent hiccups with respect to margins, as per Walt Disney Valuation by Trefis, we have a price estimate of $152 per share for DIS’ stock, higher than its current market price.

You can view the Trefis interactive dashboard – Why Disney’s Stock Climbed 40% In 3 Years? – to better understand the stock trend along with analysis of the company’s revenue, margins, and multiple. In addition, here is more Trefis Media data.

Expanding Revenue Base

• Walt Disney revenues have increased by 13.3% from $52.5 billion in 2015 to $59.4 billion in 2018, adding close to $7 billion to its revenue base.
• Revenues are further expected to increase at a higher rate of 17% to $69.7 billion in 2019, which would mark an addition of over $17 billion to total revenues over four years (2015-2019).
• Higher revenue is likely to be driven by strong performance in the Parks & Resorts and Studio Entertainment business, following the FOX acquisition.

Key Revenue Driver 1: Parks & Resorts

• The segment has added $4.1 billion to its revenue base, as sales increased from $16.2 billion 2015 to $20.3 billion in 2018, with revenue expected to increase at a faster rate to $24.5 billion in 2019 driven by strong performance in the domestic as well as international operations.
• Domestic revenue growth is driven by higher average ticket prices for theme park admissions and for cruise line sailings, increased food, beverage, and merchandise spending, and higher average daily hotel room rates, along with higher volume due to higher attendance and passenger cruise ship days.
• International operations growth is driven by increase in volumes, higher average guest spending, and favorable foreign currency impact.

Key Revenue Driver 2: Studio Entertainment

• Segment added $2.6 billion to its revenue base, as sales increased from $7.4 billion in 2015 to $10 billion in 2018.
• Studio Entertainment revenue is expected to grow at a faster rate in the near term, driven by higher theatrical distribution and TV/SVOD revenues, partially offset by continued pressure in home entertainment.
• Acquisition of Fox is also expected to drive revenue growth due to additional offerings.

Profitability

• After remaining around 16% to 17%, net income margin increased sharply to 21.2% in 2018, due to a lower effective tax rate and gain on asset sales. Net income margin is expected to drop to 18% in 2019, followed by a further drop to 16% in 2020, driven by a rise in restructuring charges and interest expense, stable tax rate and depreciation cost, absence of asset sales, partially offset by lower SG&A expense.
• Cost of products and services have largely remained range-bound, being slightly higher in 2017 and 2018, driven by cost inflation, contractual rate increases for television programming,  and higher guest spending and volumes at parks and resorts. The metric is expected to decrease in 2019, led by a sharp rise in revenues.
• SG&A expense as % of revenue has decreased over the years due to lower theatrical marketing cost and discontinuation of Infinity, partially offset by consolidation of BAMTech and costs incurred in connection with the 21CF (21st Century Fox) acquisition. The metric is expected to continue its decreasing trend.
• Depreciation expense as % of revenue was higher in 2017 and 2018, due to depreciation of new attractions at the parks and resorts segment and the consolidation of BAMTech. The metric is expected to be largely stable in 2019.
• Restructuring charges as % of revenue has decreased over recent years due to lower asset impairments. However, the metric is expected to increase sharply in 2019, primarily due to severance charges recorded, in connection with the integration of 21CF.
• Interest expense has continuously increased over the years, with the rise expected to be significant in 2019, due to higher debt balances as a result of the 21CF acquisition.
• The effective tax rate saw a sudden dip in 2018 following the implementation of the TCJ Act. The metric is expected to remain stable in the near term.

Decrease in Multiple

• Disney’s P/E multiple has decreased from 25.3x in 2015 to 16.4x as of August 2019.
• Similar trend was observed in close rival Viacom’s multiple, however, Comcast witnessed a surge in its earnings multiple during this period.
• Despite increasing revenues, DIS’ P/E multiple decreased due to a sharp rise in its debt burden.
• Along with decreasing margins, the company’s debt-to-equity ratio has crossed the 60% mark following the Fox acquisition, which has led to the market assigning a lower multiple currently.

Price Outlook

• Disney’s stock fell soon after its Q3 2019 results were announced on August 7, 2019, as despite healthy growth in revenues, the company missed consensus on earnings due to the loss incurred from poor performance of ‘Dark Phoenix’, which was a Fox-produced film.
• However, since this loss was inherited, and not due to a bad business decision by Disney, the analysts are still bullish on the stock.
• Trefis has a price estimate of $152 per share.
• We believe that the company would sustain high EPS levels, led by healthy growth in revenues and lower share count, partially offset by lower profitability.

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