Disney fires on all cylinders, but is it sustainable?

– Reports for tax purposes on Tuesday, August 6, after market closure

– Income expectation: $ 21.46 billion

– EPS expectation: $ 1.72

It took Walt Disney (NYSE 🙂 almost four years to break its record of $ 122, a level that it first reached in August 2015. Shares are now slightly lower than its new record of $ 147 ever set in July.

The nearly 30% profit of the entertainment conglomerate has been fueled this year by a fantastic year at the counter and elevated expectations for its new Disney + streaming service.

But although Disney is a solid company, investors have led the way with the celebrations. The expected figures for Disney + do not justify the enthusiasm, the media activities remain a pain, and this year's checkout numbers are more a perfect storm than an indication of the things to come.

Parks provide stable income

Disney & # 39; s revenues from its parks and hotels are perhaps one of the most stable revenue streams in all entertainment activities and the company is furiously expanding in this area.

In the six months ending in March, Disney Parks raised $ 13 billion dollars, 5% more than in the first six months of its fiscal 2018. This year it opened a major expansion at DisneySea in Tokyo, and opened a new Star Wars attraction in its Disneyland resort in Anaheim. The same attraction opens on August 29 in Orlando.

The success of Disney with its parks and hotels is not limited to growing revenues, because the operating result is growing even faster. While revenue grew by 5% in the last six months, operating revenue grew 12% year on year. Disney manages to increase the expenses and presence of guests and to increase the number of occupied room nights in its hotels. The presence in the last quarter increased by 1% and the expenditure per capita increased by 4%. In general, this is a very solid source of income for Disney and I expect it to remain one in the near future.

Cutting cords still takes a bite from ESPN

Disney was undoubtedly injured by the cutting movement. In fiscal 2018 it lost 2 million ESPN subscribers, to around 86 million subscribers. In 2011, Disney reported 100 million subscribers. The trend continued into the last quarter as Disney reported a 2% drop in ESPN earnings for subscribers.

The positive side is that although Disney & # 39; s old-school TV segment is struggling with subscribers, Disney's higher affiliate fees compensated for the decline in revenue for subscribers and the segment even grew by 3%. The operating result remained the same.

Disney & # 39; s media network was and still is a sore point for the company.

The company's struggle there eventually led to an attempt to breathe new life into its media empire by entering the streaming activities at Disney +.

Disney + will be popular, but no windfall in cash

The excitement around Disney + is one of the main reasons why the stock has risen so much this year. The service is expected to be available to US consumers on November 12 for a price of $ 6.99 per month. This is a very aggressive price since Netflix (NASDAQ 🙂 costs twice as much. But much of the excitement that is now priced in the stock will take years to work out.

Disney recently said it expects 60 to 90 million subscribers by the end of fiscal 2024. For $ 6.99 each, assuming Disney hits 75 million subscribers, Disney + would have about $ 500 million in monthly revenue or Generate $ 1.5 billion in revenue per quarter. This should add 10% to Disney's current quarterly revenue in five years. In addition, Disney expects heavy expenditures over the next three years to fund and grow the project. Disney estimates that Disney + will not be profitable until 2024.

I am currently not impressed with the growth rates that Disney expects. Netflix has 150 million subscribers and Disney only adds 10% to quarterly revenue in five years is not really the revival that many expect.

A box office 11 years in the making

Disney surpassed its all-time record at the cash register at the end of July and withdrew $ 7.67 billion after the last weekend of the month. And it's not even done for the year.

Later this year, the company releases "Star Wars: The Rise of Skywalker" in December, as well as a sequel to "Frozen 2" in November and "Maleficent: Mistress of Evil" in October.

Disney & # 39; s films performed incredibly well this year. Led by "Avengers: Endgame" with $ 2.79 billion worldwide, Disney has already released four $ 1 billion films this year (Endgame, "Captain Marvel", "Aladdin" and "The Lion King.")

Disney has strong franchises, especially in light of the acquisition of 21st Century Fox. But investors have to take this year's harvest for what it is, an extraordinary outlier. This does not mean that Disney will not come up with new hits, but a year like this was literally 11 years in the making (since the first Iron Man movie was released in 2008).

Bottom Line

Disney is undoubtedly a strong company. But I do believe that Disney's profit this year is largely based on excitement regarding Disney +, which I think is premature, and on checkout results that are impossible to replicate.

That said, Disney is currently not overly expensive. It is a 12-month PE ratio that falls behind 15.9x and is below the 5-year average of 18.2x and it would be a traditional income stock if the dividend would yield more than a measly 1.24%.

I do not believe that $ 145 is a particularly attractive entry point for new investors, given the reasons for Disney's latest valuation in value. Investors interested in initiating a long-term position can slowly start scaling up, because Disney still has a solid company in your portfolio. But I would focus on buying dips instead of paying the full price that the market demands today.

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