Do You Hold Disney? Ask Yourself Why

Disney owns iconic theme parks and renowned intellectual properties. Is that enough to make it a buy, especially after a gut-wrenching plunge from $203 to south of $87? Let's look at the fundamentals to see what DIS is worth. Before we get into the stats, here is a chart from Bespoke Investment Group research showing patient, continuous holders are sitting on small losses over the past five years. Momentum traders who jumped in near 2021's top are hurting much worse. People loved the shares on the reopening economy story as Covid-based restrictions on theme park and movie theater attendance were easing up. Ouch. DIS went from a loss of $1.57 per share in fiscal 2020 to a profit of $1.11 in the fiscal year ended Oct. 1, 2022. The surge to over $200 was a Fantasyland example if ever there was one. Decade long buy-and-hold types made out slightly better. Total return of 82.9% was reasonable. It only occurred, though, because of P/E expansion. EPS only grew by 12.8% cumulatively over the full 10-years. Regular readers know I prefer shares which offer large dollops of un-reflected value creation. That makes for huge upside potential. Disney now sits in the opposite position. The stock far outran fundamental growth leaving it set up for a price-to-earnings contraction and poor performance. Where should DIS really trade? From fiscal 2012 through 2019, before Covid, a typical P/E ran about 17.4-times, accompanied by around 1.44% in yield. After disappointing in its September quarter, Disney's fiscal 2023 estimate has come down to $4.13, from $4.85. Losses in streaming services and ever higher content costs are likely to keep profits under pressure. Applying a normalized valuation of that new estimate only suggests an end of Sep. 2023, target price of $71.86. Why even hold a stock with well-defined downside, let alone set up new positions despite the already large drop? Most quantitatively oriented research forms agree. Yahoo Finance calls DIS as being near fair value. It is trading at about 21-times their current fiscal year estimate, well above the more normal 17.4-times multiple. Fast Graphs correctly showed DIS as being grossly overpriced last year. It now looks for a further drop to about $72 by the end of September 2023. There is always somebody who is going to disagree. Independent research from Morningstar labels DIS a 5-star, best buy. The recently, and belatedly, lowered their present-day estimated fair value to $155 per share. If you believe Morningstar, Disney could be a big winner. What does Morningstar base its positive view on? It was not made clear as it feels losses on streaming services will extend well into fiscal 2024. ESPN is struggling relative to its past glory. Theme park ticket prices were raised once again, but at some point families may simply decide the tickets are no longer worth the ever-escalating cost. That sentiment would be amplified if we slide into a recession in 2023. Worst of all, Morningstar's $155 goal implies the shares can command greater than 37-times this year's earnings. That is more than double Disney's historical pre-Covid valuation. If you were thinking about buying DIS because of its pull-back, think again. If you hold DIS shares, you might wish to sell as the stock looks like dead money, at best over the coming 9 to 12 months. Do you want to make a case for owning Disney? The comment section is now open.

Do You Hold Disney? Ask Yourself Why

I challenge readers to tell me why they think owning this stock makes sense.

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