Disney (DIS) - Get Report continues to trade at a discount as investors remain on the sidelines unsure of exactly when the company returns to full operation. Amidst investor’s uncertainty and trepidation, Disney+ continues to smash all expectations. Meanwhile, investors are still not willing to pay as large a multiple for Disney as they were in 2019.
What Lies Ahead For Disney's Parks and Resorts?
There’s no question that there’s more optimism in companies right now than there has been over the past couple of months.
Indeed, with the benefit of hindsight buying at the lows of March would have been a terrific opportunity. But investors can’t invest in hindsight. Right now, looking ahead, it’s still not too late to invest in Disney.
The biggest advantage of investing in Disney right now compared to say, six months ago, is that not only is the share price still down more than 20% from its highs, but its underlying operations will come out stronger over the coming year.
Here’s the detail that matters. Disney has Parks and Resorts, which are highly profitable and critical to the core of its cash flow. Separately, Disney+ provides Disney with a strong revenue growth opportunity. Hence, I contend these two units are the key drivers of this thesis. Let’s take a closer look them.
Parks and Resorts
Investors are uncertain about just how deep Disney’s cash burn on its Parks and Resorts business will have been until the moment they reopen at full capacity.
Remember, Disney’s Parks and Resort business is responsible for bringing in huge sums of cash to its business. Specifically, for its latest figures, up until March 2020, including the period when many of its theme parks and resorts were closed, this segment had operating income profits of $639 million.
However, in order to give a sense of just how profitable this segment is, we can dissect last year’s profits.
Here, we can see that Disney’s Parks and Resorts reached close to 40% of its operating income. This gives an insight into just how important Disney’s Parks and Resorts are, while noting that many of its Parks and Resorts have been closed throughout Q3 2020 (quarter ending June). Consequently, investors are unsure of just how deep the cash burn will have been throughout this period.
On the other hand, Disney is starting to reopen in many of its theme parks over the coming few weeks, with Disney World set to reopen on the July 11 at 50% capacity.
While there is trepidation that consumers will be fearful of returning to crowded places any time soon, Chairman Bob Iger argues that spending time in parks with your loved ones will be missed and consumers will return. Thus, although there’s uncertainty over its Parks and Resorts, the icing on the cake comes from Disney+.
Disney+ Jumps Full Steam Ahead
Streaming wars continue to pick up momentum, and it's unknown whether the ultimate fall-out will be a duopoly with Netflix (NFLX) - Get Report and Disney+, an oligopoly with Netflix, Disney+, Apple TV+ (AAPL) - Get Report, and Amazon Video (AMZN) - Get Report, or whether the market will become increasingly fragmented with smaller players such as HBO Max from AT&T's (T) - Get Report WarnerMedia and Peacock from Comcast's (CMCSA) - Get Report NBCUniversal.
What we do know is according to the most recently reported figures last month, Disney+ has 54.5 million subscribers. This not only puts it far ahead of its own projections of 60 million to 90 million by 2024, but vindicates the power of its brand.
But Is The Stock Cheap?
During 2020 and into early 2021, Disney will not be operating at full potential. That’s a given and has been priced in already. However, once a vaccine is hopefully out, one can reasonably expect, as Iger argues, that consumers will return to things they miss most -- such as visiting theme parks and resorts.
It’s entirely likely that by this time next year, Disney will be well on its way towards being fully operational. How long until Disney is making close to $8 billion of free cash flow is the main question.
However, we can hope that over the next twelve months its parks are likely to be operating at close to full capacity, and Disney will also have its streaming platform with new content and a much bigger subscriber base.
All these taken together, as well as the fact that the market is forward-looking, makes paying just 2.7x times its trailing sales a bargain opportunity. Particularly when we consider that investors were paying 3.5 times sales in 2019 before investors knew whether or not Disney+ would be the huge success it has turned out to be.
The Bottom Line
Disney’s films are little more than a funnel into its huge ecosystem, where it brings consumers to either its parks and resorts for an immersive pleasure or Disney+ to experience the best of Disney in one’s living room. Of course, that’s for the family. As for the shareholder, they can still do all that while profiting from this investment.