Up 25% This Year, Will Disney’s Strong Run Continue Following Q2 Results?

Disney (NYSE:DIS) is expected to publish its Q2 FY’24 results on May 7. We expect Disney’s revenues to come in at $22.2 billion for the quarter, slightly ahead of consensus estimates, marking an increase of over 2% versus last year. We expect earnings to stand at $1.11 per share, roughly in line with consensus.  See our analysis of Disney Earnings Preview for an overview of how Disney’s revenues and earnings will likely trend for the quarter.

So what are some of the trends that are likely to drive Disney’s results? We expect Disney’s theme park business to see modest growth. While the company’s international parks should see higher attendance and rising spending at its Shanghai and Hong Kong properties, there could be some softness in the domestic side of the business due to higher costs and tough comparisons with the year-ago period. For perspective, over Q1, international parks revenue rose by over 35%, while the domestic side of the business grew by less than 4%. Disney’s linear TV business saw some headwinds over Q1, amid lower advertising and affiliate revenues. There is a possibility that things could improve a bit over Q2.  Investors will also be closely watching the performance of Disney’s streaming business, which has faced headwinds of late due to mounting competition, the impact of price hikes, and the loss of rights to stream the popular Indian Premier League. Over the last quarter, overall sales of the direct-to-consumer streaming business rose by about 15% to $5.5 billion. Over the last quarter, the Disney+ subscriber base declined by 1.3 million sequentially on account of price increases, although the company saw average revenue per user rise.

DIS stock has suffered a sharp decline of 35% from levels of $180 in early January 2021 to around $115 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.
Notably, DIS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -15% in 2021, -44% in 2022, and 4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that DIS underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the mega-cap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DIS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

So is Disney stock undervalued in the current environment? Despite concerns in the streaming and media operations, we remain positive on Disney stock for a couple of reasons. Disney is looking to unlock more value by restructuring its business while cutting costs to bolster profitability. The company expects to meet or exceed its goal of cutting about $7.5 billion in expenses by the end of this fiscal, with earnings per share projected to grow at least 20% versus the last year. Disney stock also remains down by over 40% from the highs seen in 2021.  We value Disney stock at about $124 per share, which is about 10% ahead of the current market price. See our analysis of Disney’s valuation for a closer look at what’s driving our price estimate for Disney. Also see our analysis on Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

[1] Returns as of 4/25/2024
[2] Cumulative total returns since the end of 2016

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