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Historical Valuations Could Hamper Disney Stock Growth

DIS stock multiples are at multi-year highs after Disney+ pop

The Walt Disney Company (NYSE:DIS) continues to add to its attractions as it launches Star Wars Galaxy’s Edge at its Disneyworld and Disneyland parks. The Parks and Resorts division has long served as Disney’s strongest division regarding profit growth. Still, whether that will help Disney stock remains unclear. Over the last few years, the shares fell and then increased based on television, and now, the performance of its streaming services. Given recent historical patterns, streaming, and not theme parks, will continue to drive the DIS stock price.

Historical Valuations Could Hamper Disney Stock Growth

For all of the talk about theme parks, media has long driven Disney shares. The steady increases that defined DIS stock for the first half of the decade came to an abrupt halt in 2015. Customers were dropping both the Disney Channel and ESPN en masse as they turned away from cable and satellite to TV to lower-cost streaming services.

Things changed last month when the company announced a launch date for its streaming service, Disney+. But streaming for Disney is shaping up to be more than just Disney+ and ESPN+. The company picked up 10% more of Hulu from AT&T (NYSE:T). That boosted Disney’s Hulu stake to 70% and with it came full control of the content and streaming platform per an agreement with co-owner Comcast (NASDAQ:CMCSA), which agreed to sell its 30% stake to Disney in five years.

Nobody expects these streaming services to make up for the revenue lost from its declining subs from the Disney Channel and ESPN. In fact, profit estimates have fallen in recent weeks as the prospect of higher content costs weighs on DIS. Analysts now forecast that profits will fall by 7.2% this year and by 2% in 2020.

Disney Stock Depends on Multiple Expansion

Nonetheless, the challenge that Disney+ poses to Netflix (NASDAQ:NFLX) inspired a one-day 11.5% bump following the announcement. The DIS stock price has retreated modestly since that time. Still, with a Disney stock price of around $134 per share, the forward price-to-earnings (PE) ratio now stands at about 20.

That’s a problem. The five-year average PE comes in at around 18.8. Over the last 10 years, the average PE ratio on Disney stock has never reached above 22. The consensus price target now stands at $150 per share, with other estimates going as high as $170 per share. Reaching the $150 per share target would take the PE ratio to around 23.

That represents an increase of just under 12% from current levels. Hence, traders need only see a modest move higher before Disney stock becomes a bet on multiple expansion.

It could happen. At current prices, Netflix trades at just over 100 times forward earnings. And let’s not forget about the mere announcement of the Disney+ launch that led to a massive one-day spike in Disney stock.

I see this as a reasonable bet for current long-term holders of DIS. Given the success of the theme parks and franchises, profit growth will resume at some point. They have past profits and a higher dividend yield to rely on. However, new buyers face more of a gamble. If they do not get the needed multiple expansion, they might have to wait years before they turn a profit on Disney stock.

Bottom Line on Disney Stock

Theme parks may drive Disney but in recent years, subscriber numbers have driven Disney stock. With the opening of the Star Wars-themed areas, one has to assume the Parks and Resorts division will continue to lead the company in revenue growth. Unfortunately, this has brought little benefit to holders of DIS stock. That trend will likely continue.

DIS stagnated for years as cable-cutting led to smaller audiences for both the Disney Channel and ESPN. Now, it recently moved to record highs after the Disney+ announcement.

Unfortunately, to move significantly higher, Disney stock will have to do something it has not done in decades — trade at more than 22x earnings. Streaming media could drive multiple expansion. If it sustains itself above a 23x PE, DIS stock could move much higher. However, if traders balk, new investors could wait years before seeing a profit in DIS.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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