Since my last article in July on Disney (NYSE:DIS) stock, it has moved up only slightly. I suspect Disney stock will tread water the rest of the year, partly due to its high valuation and partly from the effects of the novel coronavirus.
When I wrote the article on July 22, Disney was at $119.03, and now it’s around $125. I argued that the stock was simply too expensive at 38 times 2021 forecast earnings.
In the last six months, Disney stock is up 24.8%. But year-to-date it is down 15.3%, as of Sept. 25, and negative 7% in the past year. That is nothing to write home about especially since its valuation is so high.
Delays and Disappointments
Recently the company reported it was going to delay the release of its expected blockbuster film Black Widow to May 2021. This apparently had a ripple effect on its slate of Marvel film releases.
Moreover, and more importantly, apparently, its much talked-up Mulan film release had a “tepid” showing in China, according to Barron’s. That is not good for both its franchise value and the stock’s valuation.
Another disappointment is that Hong Kong Disneyland recently shut down after reopening on June 18. Restrictions by the government and health authorities in Hong Kong were the reason. The facility reopened on Sept. 25.
Moreover, Disney’s California theme parks and resorts have remained shut since March, even though the rest of the nation has opened up.
In addition, sports ratings for ESPN have been difficult. Much of the baseball season did not air and the Major Leagues are considering holding playoffs in controlled sites.
Analyst Expectations and Valuation
According to Marketbeat.com, 28 analysts have an average “buy” rating target price of just $131 on DIS stock. That represents an upside of just 5.77% for investors in the stock.
Moreover, Disney cut its dividend to zero in 2020. So there is nothing to help the stock on the downside as a dividend payment tends to do for high-priced stocks.
Moreover, the stock now has a higher price-earnings (P/E) valuation than when I wrote about it in July. For example, 15 analysts polled by Yahoo Finance estimate that its 2021 earnings will be $2.67 per share.
That puts DIS stock on a forward P/E multiple of 46.4 times earnings, versus my previous July article where the valuation was 38 times.
This makes no sense since nothing has really changed for the company. In fact, in July earnings estimates were $2.98 EPS in 2021. Now the average of those same analysts is 10.4% lower at $2.67 EPS.
But not so fast. Not everyone is critical. Barron’s wrote recently that one analyst, Deutsche Bank media analyst Bryan Kraft, is bullish on DIS stock.
His thesis is that the future for Disney is in streaming and it has a stellar balance sheet. That alone will prevent it from going out of business. Moreover, the at-home restrictions for most people are forcing them to enjoy entertainment online.
Disney+ and Hulu, both Disney streaming products, are doing well. Disney+ has picked up 60.5 million worldwide subscribers since debuting in November. Both products are picking up millions of subscribers each month.
They expect the same with a new international service to be named Star next year. Kraft says that Disney is in a land grab for these direct-to-consumer streaming products. He believes it will become its most valuable business segment in the next few years.
What to Do With Disney Stock
The patient investor will recognize that Disney is in the middle of a turnaround or, more precisely, a business model transition. It is changing its long-term business model so that it is not so venue-related but more streaming, content, and direct-to-consumer focused.
This is going to take some time. But the stock is not likely to fall by much as the company has plenty of resources. But, on the other hand, Disney stock is likely to tread water for a while its earnings catch up with its valuation.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
