Case Study: What Credible analysts are saying on Disney (DIS) stock
Key Points
The Walt Disney Company shares rallied by roughly 9% this week. DIS shares are now down nearly 33.25% on the year, drastically underperforming the S&P 500, which is down by roughly 16% during 2022 thus far.
Disney continues to invest heavily in its streaming platform and direct to consumer content; however, management doesn’t expect its Disney+ streaming service to be profitable until 2024. High capital expenditures are hurting cash flows and this makes the company’s high debt load a concern for certain investors.
Disney announced that it was replacing its CEO, Bob Chapek, with former CEO, Bob Iger this week.
54% of credible authors offer a “Neutral” bias towards Disney shares. 6 out of the 7 credible Wall Street analysts believe that DIS shares are headed higher. The average price target being applied to Disney shares by credible analysts is $138.17 which implies upside potential of approximately 40% relative to DIS’s current share price of $96.20.
Morgan Stanley analyst Benjamin Swinburne, who receives a Nobias 4-star analyst rating, said that he believes Iger's return "improves the risk/reward" surrounding Disney shares.
Matthew Clark, a Nobias 4-star rated author, said, “We consider it [Disney] a “High-Risk” stock and expect it to significantly underperform the market over the next 12 months.”
Performance
Event & Impact
Noteworthy News:
Nobias insights
Bullish Take:
Bearish Take:
Last weekend, Disney made headlines announcing that it was removing its CEO, Bob Chapek, and replacing him with his predecessor, Bob Iger. Nobias recently highlighted Disney’s recent Q3 earnings data in a report; however, this CEO news is material to sentiment surrounding shares and therefore, we wanted to provide an update to subscribers on Disney’s outlook.
DIS Nov 2022
Iger’s return was unexpected on Wall Street and the surprise caused Disney shares to rally by nearly 10%. Despite this rally, Disney shares have still underperformed the S&P 500 by a wide margin in 2022 thus far. On a year-to-date basis, Disney is now down by 33.25% compared to the S&P 500’s -16% performance. But, the credible Wall Street analysts that Nobias tracks see strong upside potential ahead for Disney shares, implying that the stock’s recent rally could spark a larger share price rebound.
Bearish Nobias credible authors:
Matthew Clark, a Nobias 4-star rated author, published a report at Money and Markets that highlighted the management transition at the Walt Disney Company. Clark began his piece stating, “One Bob is out. An old Bob is in. “Over the weekend,” he continued, “The Walt Disney Co. surprised everyone by firing CEO Bob Chapek and appointing former CEO Bob Iger to the job.”
Clark said, “It’s been less than three years since Chapek replaced Iger, who was Disney’s CEO for 15 years.” He noted that this move was so surprising because in June on 2022, Disney extended Bob Chapek’s contract through 2025. “At the time,” Clark said, “the board said Chapek’s leadership was key to helping the company through the COVID-19 pandemic.” He highlighted quarterly data showing that revenues rose coming out of the pandemic; however, in recent quarters, they “stagnated”.
Disney’s focus as of late has been on growing its streaming platforms. Streaming was the focus on many of the authors/analysts that we quoted in the recent Disney Q3 quarterly review. And, Clark made it clear that Disney’s streaming platforms remained one of Chapek’s highest priorities.
By November of 2022, Clark notes that Disney Plus had 164 million subscribers and Disney’s bundle, which includes Disney+, Hulu, and ESPN+ had 235 million subscribers overall. “However, the streaming business continues to lose Disney money … to the tune of $1.5 billion last quarter and $4 billion for the year,” Clark said.
Looking at a series of broader fundamental metrics, including, Disney’s size, volatility, growth, momentum, value, and quality, Clark notes that DIS stock’s performance was poor in all but the “Quality” rating system. “That means we consider it a “High-Risk” stock and expect it to significantly underperform the market over the next 12 months,” he said.
Ultimately, Clark wrote, “Bringing in former CEO Bob Iger to lead the business may turn around The Walt Disney Co.” But, he continued, “it’s going to take patience” and therefore, Disney “is a stock to avoid in your portfolio now.”
Trapping Value, a Nobias 4-star rated author, also covered Iger’s return in an article this week titled, “Disney: Why The Return Of The Jedi Won't Work”. Trapping Value highlighted Iger’s past success, showing why the market’s initial reaction to his return to Disney was a positive one (Disney shares are still up by roughly 9% since Iger’s return to the c-suite was announced).
The author wrote, “Iger's claim to fame comes from the tremendous performance of the stock from September 30, 2005 to February 25, 2020. During the nearly 15-year tenure of Iger, DIS stock rallied more than 500% for an annualized gain of 13.9% including dividends. Total returns demolished that of the S&P (SPY) by a huge margin and investors could not say enough good things about the old guard.” But, they also provided caution, stating, “While the numbers appear spectacular and they were, a good deal of the return came from valuation expansion. Disney's price-to-sales ratio more than doubled during Iger's tenure.”
For comparison’s sake, Trapping Value noted that the S&P 500’s price-to-sales ratio increased by only 60% during this same period of time, showing that Disney’s share price outperformance was driven largely by relative sentiment, as opposed to fundamental growth.
Trapping Value was sympathetic towards Chapek, writing, “Chapek's term was of course marked by the brutal COVID-19 induced recession, but more importantly, is a tale of excesses coming home to roost.” And, while it’s possible that the positive sentiment that Iger has been known to garner could return and surround Disney shares for years to come, Trapping Value believes that investors should focus on the company’s fundamentals. They said, “While Disney has got back to profitability quickly after COVID-19, investors are likely eyeing that cash flow statement with some concern. The company managed to generate free cash flow this year (8-K Link), but the amount trailed net income by more than $2.5 billion.”
Trapping Value continued, “Streaming costs are exploding in the current high inflation environment and there are plenty of competitors that are spending without worrying about profits. This remains the biggest concern and all hopes of significant free cash flow and we might add those big earning numbers for future years, depend upon turning this around.”
Ultimately, the author concluded, “As amazing as Iger's performance was, this comeback story has more room for disappointment than for a heroic ending.” And therefore, Trapping Value wrote, “We rate it [Disney] at Neutral for now.”
While Trapping Value provided a relatively neutral take on Iger’s return, Harold L. Vogel CFA, a Nobias 4-star rated author, provided a distinctly bearish piece this week, stating that investors should use the recent share price rally related to the Iger announcement as an opportunity to sell shares.
Like Trapping Value, Vogel highlighted Iger’s prior success, stating, “His record as CEO for 15 years has generally been good, especially on the early acquisitions of Pixar, Marvel, and Lucasfilm (Star Wars franchise).” “However,” Vogel said, “it seems that he overpaid for Twentieth Century Fox entertainment assets. Rupert Murdoch, to make a pun, “outfoxed ” him and was prescient in seeing that Fox could not gain sufficient scale in streaming or films and had a chance to become a major shareholder of a better growth vehicle in Disney shares.”
Looking at Disney’s recent performance under Chapek, Vogel acknowledged the COVID-19 pandemic headwinds that Disney faced, but went on to say, “soon after in late 2020, the company began to falter, in my opinion.” He continued, “It [Disney] became a woke-driven company that seemed to forget that its history, traditions, underlying culture, and operating structure were intended to appeal to the core base of middle-income families.” This is going to be a difficult problem for Iger to solve, in Vogel’s opinion.
Furthermore, he said, “In other areas, such as content distribution, Chapek approved a major reorganization that upset relations with creative talent. It will be a massive challenge for Iger to undo/fix this. In the process, much creative energy will be wasted as managers are reassigned and/or leave.”
“Meanwhile,” Vogel continued, “cord-cutting will continue to sap the high-margin profits of the cable networks as the transition to streaming is still largely a drain on cash flow.” “ESPN may eventually be spun off, and the linear ABC might also be headed for the same fate. Private equity companies are likely to be the buyers,” Vogel wrote.
In the end, Vogel said, “Mr. Iger has the ability and power to fix some of the current disorders but he can't perform miracles.” And therefore, he concluded, “I'd take the investors' enthusiasm rally about Mr. Iger's return as an opportunity to sell.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Bullish Nobias credible authors:
While we saw a couple of bearish reports published by credible authors this week, Morgan Stanley analyst Benjamin Swinburne, who receives a Nobias 4-star analyst rating, said that he believes Iger's return "improves the risk/reward" surrounding Disney shares.
Swinburne said that Iger has the "experience and credibility to execute what can only be described as an operational turnaround." Swinburne maintained his “Overweight” weighting for Disney shares with a $125.00/share price target.
Overall, the schism between the more bearish authors and the more bullish Wall Street analysts that recent reports highlight is representative of the broader sentiment being expressed by these two communities of credible individuals that the Nobias algorithm tracks.
Overall bias of Nobias Credible Analysts and Bloggers:
54% of recent articles posted by credible analysts express a “Neutral” bias for Disney shares. However, 6 out of the 7 credible Wall Street analysts that Nobias tracks who have offered an opinion on Nobias shares believes that DIS is headed higher. Currently, the average price target being applied to Disney shares by credible analysts is $138.17. Relative to Disney’s current share price of $96.20, this implies upside potential of approximately 40%.
Disclosure: Nicholas Ward is long DIS. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.