Disney (NYSE:DIS) stock is treading water. Shares now trade around $135, down from as high as $147.15 in late July. The recent earnings miss calls into question the current valuation of Disney stock. But with the launch of Disney+ around the corner, is now the time to buy DIS? Disney stock continues to trade at a premium compared to its peers, but offers material upside in the long-term. Let’s take a deep dive and see what’s the verdict with Disney stock.
Recent Performance of DIS
Disney announced earnings on Aug. 6. DIS saw earnings per share fall 59% year-over-year. Much of this decline was due to the integration of recent acquisitions 21st Century Fox and Hulu. Excluding these items (amortization and impairment charges on intangible assets), EPS fell only 28%. The integration of these assets offers long-term upside. But in the meantime, integrating these operations is a work-in-progress.
21st Century Fox’s film division has under-performed. Recent release “Dark Phoenix” was a box office bomb. But Disney’s film division continues to be strong. “Avengers: Endgame,” “Aladdin” and “Toy Story 4” met expectations. For the third quarter, Disney should see additional strong performance in the film division. Disney’s July release of “The Lion King” has already generated over $1.4 billion at the worldwide box office. As I stated in a previous article, the Magic Kingdom continues to be “king of content.”
Through Aug. 18, Disney’s film distribution arm, Buena Vista, had 37.1% of the box office market share for 2019. This is leaps-and-bounds ahead of number two, Comcast’s (NASDAQ:CMCSA) Universal. Universal’s year-to-date market share is just 13.8%. Add in 20th Century Fox’s box office take, and Disney has more than 40% market share. Theatrical revenue is a small component of today’s film business. But it is a strong indicator of the residual value of Disney’s film assets. In the more lucrative television and streaming markets, Disney’s content is king. This mass appeal will translate well when Disney launches the anticipated Disney+ service later this year.
Full Steam Ahead for Disney+
Disney’s new streaming service goes live in November. Disney+ could disrupt Netflix’s (NASDAQ:NFLX) current streaming dominance. As InvestorPlace’s James Brumley wrote last week, the company will bundle Disney+, ESPN+ and Hulu in a $12.99/month package, the same price point as Netflix.
As I mentioned in my recent Netflix analysis, NFLX’s U.S. subscriber base is falling. Content producers are demanding higher licensing fees. In addition, Comcast’s NBCUniversal and AT&T’s (NYSE:T) WarnerMedia are hoarding properties such as “The Office” and “Friends” for their respective streaming apps. Netflix believes it can counter this with billions invested in original programming. But, Netflix has not yet created a show with the matched popularity of its licensed content. On the other hand, Disney has an impressive library, thanks not just to its own content, but to Fox’s extensive film and television library as well.
With Disney+ around the corner, should investors nix NFLX and stock up on DIS? Let’s take a look at valuation, and see if the opportunity justifies the price.
Valuation: Is Opportunity Worth the Current Price?
DIS stock currently trades at a forward price-to-earnings ratio of 23. The company’s Enterprise Value/EBITDA ratio is 18.7. This is a substantial premium to its big media peers:
- AT&T: Forward P/E of 9.7, EV/EBITDA of 8.2
- CBS (NYSE:CBS): Forward P/E of 7, EV/EBITDA of 8.6
- Comcast: Forward P/E of 13, EV/EBITDA of 9.6
- Viacom (NYSE:VIA, NYSE:VIAB): Forward P/E of 6.2, EV/EBITDA of 6.3
But as I have mentioned before, comparing DIS stock to its peers is not apples-to-apples. AT&T and Comcast are both telecom companies with attached media businesses. CBS and Viacom (which are going to merge) face headwinds in the age of streaming. But compared to the valuation of NFLX, Disney stock is a clear bargain. NFLX trades at a forward P/E of 92.4, and an EV/EBITDA ratio of 52.8. Compared to NFLX, Disney is the smarter play. With DIS stock, you get a highly profitable media conglomerate with potential upside from streaming.
Bottom Line: Wait to Buy DIS Stock
Disney stock should continue to win in the long term. If the upcoming Disney+ platform performs as expected, the company should see continued growth, even if their legacy cable networks business sees long-term decline. However, there are negative factors to consider. While it trades at a lower valuation than NFLX, Disney shares trade at a substantial premium to its big media peers. A recent claim that Disney overstated its theme park revenue could be a potential risk. But this recent news item is still playing out.
The launch of Disney+ is a long-term play. Profitability is years away. In the meantime, a market correction could impact the valuation of DIS stock. Coupled with short-term growing pains, DIS stock could be a bargain sometime down the road. For now, wait on the sidelines as new developments factor into the stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.