This decline seems overdone in my opinion. In 2020, the global economy faced the risk of a prolonged depression and a slump in spending, a spike in unemployment and massive supply chain disruption.
Today the picture is uncertain, but I still think it is far better for Disney than it was in March 2020. For a start, Disney has made a huge success of its streaming service. Its amusement parks are also back up and running again, and it remains one of the most iconic brands in entertainment.
The company’s outlook is improving
Though Netflix (NFLX, Financial) is still dominating the streaming market in terms of overall subscriber base with nearly 220.7 million subscribers, Disney+ is catching up rapidly. It has acquired 152.2 million subscribers since launching in 2019 and it does not look as if this growth is going to slow any time soon.
As Netflix is struggling to maintain its growth, consumers are still flocking to Disney’s offering. Disney’s streaming service, Disney+, gained 14.4 million subscribers in the second quarter, compared to Netflix’s loss of just under 1 million subscribers.
Still, the company is continuing to recover from the pandemic. With revenues from its theme parks still recovering, Wall Street analysts have pencilled in earnings per share of $3.85 for 2022 rising to $5.43 in 2023. That is still far below the $7.23 per share reported for 2018 and $6.24 for 2019.
Notably, Disney has not restored its dividend, which it cut in 2020 to conserve cash. Analysts do not expect the payout to return until 2023 based on earnings growth projections.
Look to the long term
This begs the question, does Disney deserve to be undervalued, or is the stock’s slump just a reflection of the market’s wider malaise? It seems it is the latter in my view. Shares of Disney have traded around 15 to 20 times forward earnings predictions for much of the past five years. Today, based on Wall Street estimates, the stock is trading at a forward price-earnings ratio of 17.9. That suggests shares are neither cheap nor expensive.
However, in the past two years, the stock has looked expensive, trading at a price-earnings ratio as high as 100 at some points. This was due to a combination of the market bubble, Disney's drop in earnings due to the theme park closings and investments in the currently unprofitable Disney+.
Based on these numbers, it appears as if the market’s view of Disney has reverted to the mean after two explosive years. This could present an opportunity for value investors who can look past current market conditions to the long term.
Disney has not lost its competitive advantages. In fact, one could argue that thanks to the growth of Disney+, its advantages are only more entrenched. Consumers know and love the brand, and they are willing to pay a premium to get access to its services and watch its programs. In a harsh economic climate, these advantages are vital.
The real question we need to be asking is not if Disney is expensive, but if the company’s competitive advantages are under threat. Based on the information we have today, I would argue they are not.
This makes it easier to assess if the business is a good value. Assuming the company's moat remains in place, I see no reason why it cannot grow earnings at least in line with inflation in the long run.
In the 10 years to 2019, Disney had achieved compound annual earnings growth of 12%. If it can return to this trend, I estimate the company could be significantly undervalued at current levels, a theses which is supported by the GF Value chart: