Disney: A Long-Term Buy At These Levels Based On Assets

Summary:

• I remain bullish on Disney’s long-term prospects, despite current issues.
• Disney’s valuation is expensive compared to peers, but its strong assets are expected to create value in the future.
• Upcoming price action may be influenced by negative issues surrounding the company and its releases, as well as an executive change.

Disney (NYSE:DIS) is not going away, either as a company or as a stock. But it does have a few issues to resolve.

Before I get to some recent news I’d like to comment on, let me first address the stock: I still am bullish on the long-term prospects of the shares. It will be helpful when the dividend eventually comes back, which CEO Bob Iger believes will return around the end/beginning of this/next year, considering that the stock has been weak and/or rangebound (you need some return of value for reinvestment purposes, after all), but I believe the company’s assets are strong enough to create value in the years to come.

At the time of this writing, the valuation according to SA is still expensive compared to the company’s peers (forward adjusted P/E is 22 to sector median of 14) but the forward PEG is roughly 1 versus 1.5, so there’s a bit of balance there. For a company like this, a large-cap mature media play, I tend to look at the 52-week range for additional guidance: at $84 versus $126, any pullbacks closer to the lower handle would be ideal dollar-cost-averaging opportunities.

Beyond that brief stock-based discussion, upcoming price action may be determined in part by a few negative issues surrounding the company and its releases, as well as an executive change. It’s also worth considering an update to Bob Iger’s recent tenure, and how he is handling the Disney turnaround.

The bullet points this time around are:

• CFO exit
• Box-office performance
• Writers’ strike
• Overall costs for content
• A new reliance on parks

The first point about the CFO exit is somewhat difficult to define precisely. On the surface, it seems as if financial chief Christine McCarthy had to leave for medical reasons, perhaps related to someone in her family (as mentioned here).

As mentioned in this trade article, there is some reporting that perhaps there could be additional reasoning behind the departure, which has been described as an abrupt one.

Disney is in severe cost-cutting mode right now, with large layoffs in the mix, as well as rationalizations of other processes, including content development. If one reads between the lines of the reporting, one might come away with the impression that McCarthy wasn’t up to the task of properly adjusting the cost structure to the way Iger wanted. But perhaps the cost-cutting was causing too much strife, as it’s also been reported that the former CFO was at odds with other parts of the management team, including the CEO.

No matter what exactly is going on, losing an experienced CFO is a complicated development for a CEO on a clock: Iger is supposed to leave by the time 2025 arrives. But…can he? Or…will he?

A Loop Capital analyst is guessing that Iger won’t be able to leave. Quite frankly, I might be so bold as to say that there is close to a 100% chance he won’t. How, under these circumstances, both in terms of the macroeconomic environment and the sudden change in the C-suite portfolio, can he leave so quickly?

And that’s just one aspect of the complicated situation Iger has now found himself in. We now have to move on to the recent box-office slate. Yes, it is still the post-pandemic period of rebuilding, but the studio that nevertheless scored a record hit with the second Avatar picture now faces further headwinds.

The company has two problems upfront: lackluster box office from its big brands and an announced delay of film product.

Iger’s investments in Pixar/Marvel/Lucasfilm always came with the risk that someday, once that acquisition model matured, growth would slow down; in other words, not everything can be a hit, and sometimes a few films can generate an overall slate out of sync with current marketplace trends.

The good news, however, is that the company can always modify its window plans and port product over to D+; recall that a streaming service can also be a backup amortization device that hedges risk (in addition to all the other ancillary distribution channels). An off slate also becomes instructive to the company in terms of figuring out how the market wants to interact with new product from these big brands…Iger speculated recently that the company may need to focus on certain characters over others (e.g., a not-so-well-known Marvel hero may only need one or two features instead of five).

Right now, The Little Mermaid has taken in about $500 million globally – certainly not a failure, but as we all know, Iger didn’t embark on a tentpole strategy to have summer films gross half-a-billion worldwide…the overall gross has to start with a b, not an m. That’s a synergy-pumping franchise. Obviously that can’t happen all the time, but that is the goal, and it looks like Mermaid probably won’t reach that amount; nevertheless, long-term shareholders should be glad that the movie exists because it helps to propel people into the parks, sell merchandise, and continue a franchise along its life cycle. Mermaid was an obvious development since the company wants to extend the life of all its valuable IP…there would be nothing wrong in trying again with a sequel or streaming series with this particular property; in fact, I think Disney should continue to support this new iteration of the classic tale to keep up its cartoon-to-live-action franchise.

The situation is a bit complicated because it can be looked at in two ways: the project had a strong start, but its economics needed a certain velocity to take hold to ensure that the $400 million spent to create the negative and then market it was money well spent. Again, I can’t fully say what the final gross or ultimate profit will be, but unambiguity is what Disney strives for when it comes to its films.

We can also look at Pixar’s latest, Elemental, as discouraging: as of this writing, it has only grossed about $60 million worldwide. For a project with a $200 million negative cost and millions more in marketing, that not only has to hurt, but it might encourage Iger to have the company focus on Pixar-franchise material for future outings: sequels to Toy Story, Cars, etc. Pixar has always been a puzzle for me as a shareholder in this sense: the company has an outstanding quality-control department in its “Brain-Trust” method – that is, its relentless attention to perfection via a committee of its best human resources. Sometimes, though, one has to wonder if perhaps the company should try to release more product in the marketplace – more films, more episodic, more short films, more direct-to-video – to fully justify the original investment. If, as time goes on, the box office might become less impressive, then it might pay to have a longer-tail mechanism in place to create more revenue streams to return value to Disney itself as compensation (and, yes, Pixar has already amply compensated Disney arguably, but we’re all forward-looking, right?). Could Pixar release three films per year, as an example? One franchise-based, one original, and one lower-budget? It’s a worthwhile question to ask. Again, as time goes on, models need to adjust.

But then we can also think about the upcoming Indiana Jones film: tracking for this one has come in very low, at around $60 million for the opening weekend as of this writing. Some observers have expressed disbelief at such a low number, and you can count me as one of them – it’s difficult to believe that this movie, the last one in the series with star Harrison Ford, will do less than the previous sequel’s (Crystal Skull) debut of around $100 million back in 2008. Just given the fact of inflation in movie-ticket prices since then, I just find it hard to believe the film won’t produce a 100-handle on the opening.

Yet…what if it doesn’t? It’s somewhat unthinkable, but again, as we move further and further into the Tik-Tok generation and whatever future evolutions of social media assert themselves in their disruptive ways, many of Disney’s intellectual properties will become legacy assets unless properly rebooted and reimagined; this is why I argue that Disney should continue with the Raiders franchise and not stick to its ostensible plan not to recast the Ford role with someone else. Even a remake of the first film should be on the table, as it might set the tone for a new generation of fans.

Franchise fatigue aside, shareholders would certainly be justified in being wary of the writers’ strike and the announced delay of some Disney features. Taking the delay first: I have to say, I’ve always found the pushing back of release dates to be a big concern. A franchise model works best when product is delivered to the marketplace according to the intended schedule; shuffling release dates inevitably leads to revenue timing issues, and with a company such as Disney, while it is thankfully somewhat immune because of its diversified approach to media, it can lead to weaker results from the absence of movies to synergize with the parks and other platforms (D+, ABC, and so on).

And let’s face it: simply put, Disney needs to bring in cash flow sooner rather than later – consider the time value of money, as well as the need to get back to a thriving dividend, in support of such a statement. The next Avatar will be out during Christmas of 2025, not 2024, and two other sequels will hit theaters in 2029 and 2031. As much money as Avatar brings in – and it brings in a lot, well over $500 million, even after James Cameron’s cut – I always marvel at how it just isn’t the best approach to tentpole production given the space of time between releases. Of course, Disney inherited the series from its Fox acquisition, and I’m not trying to downplay its usefulness or importance to shareholder value, but…delays can be costly, both directly and opportunistically (by the latter I mean any alternate opportunity to make a film that didn’t require the perfecting process of a meticulous auteur).

Yes, the writers’ strike is obviously affecting things, but my hope would have been for the company to have a system in place that would have adjusted quickly to finish the product. And it’s ultimately unclear to me exactly what is driving the delay…in the case of Avatar, it’s been stated (by producer Jon Landau) that the date changes can be sourced to needing more time. A Star Wars film was supposed to be out in time for the holidays in 2025, but that now will happen in summer 2026, and that change may allow for two Wars features to hit in ’26 (the other one during the holidays), but if you ask me, I would bet that one of them could be taken off the calendar at any moment. And, of course, there are Marvel-movie date changes, too, with an Avengers product moving from May 2025 to May 2026.

It’s in Hollywood’s best interest to settle the strike as soon as possible, but on the other hand, the whole issue of increasing residuals brings an interesting context during a time in which volume of content on streaming platforms is no longer the top goal; indeed, product is being pulled and charges are being taken as movies and episodic are dropped from digital menus to avoid further residual payments. Licensing to other services looks to be the preferred method for media companies to cut costs and create new revenue opportunities. In fact, Warner Bros. Discovery (WBD) apparently doesn’t have a problem with the concept of its HBO library hitting the Netflix (NFLX) queues. In that linked news item, it’s mentioned that dealing with Netflix would be more about money coming in than a distinct, deliberate change in overall strategy, but my recommendation would be that media companies like WBD and Disney actually strategically position themselves to be content suppliers in addition to direct-to-consumer brands.

Why not do both, right? I’ve advocated prior on this point, and I can even bring up an example where Disney could have had the proverbial cake and also eaten it: remember the whole Turner Network thing with the Wars films? This was back in 2016, when Turner purchased cable rights that apparently precluded Disney from playing its Wars IP on D+, which would launch later in 2019. Setting aside the surprising fact that Iger, for all his visionary acumen vis a vis the industry of tentpole branding, as well as hoarding character portfolios via acquisition, didn’t foresee a future conflict with licensing terms that didn’t take into account the eventual creation of a direct-to-consumer antidote to declining linear subscribers, I always thought that trying to reclaim the rights was an odd concept, since the content could exist ad-free on one platform and ad-supported on the other…that, essentially, would have differentiated the presentation of the products and highlighted the value of D+ at the time (now, of course, the service has an advertising-linked option).

There were additional complexities, too, as other streamers held various Wars rights, but with all that as a brief background, it’s become even clearer to me that streamers need to license product to each other, even the stuff that was supposed to be highly exclusive (one wrinkle that could be added to the idea: make the licensed content a bit incomplete by editing out certain scenes, or in some way making it different; the streamer of origin could keep the full, director’s-cut content perhaps with some extras attached). In a sense, given the effect of consumers churning away from one service to another in temporary manner, trying to capture one piece of content or another for the price of a month’s subscription, licensing may assist in stemming churn if the consumer understands that, eventually, content from D+ or Paramount Global’s (PARA) (PARAA) P+ will head their way. Perhaps terming it eventual is a stretch, but you get the point: if content is moving around – and it already does in many instances for library product – then consumers will be just as trained to wait for a high-probability arrival of a movie or series on their preferred platform as some say they are to wait for a Pixar cartoon to hit D+ as opposed to feeling the need to buy a theatrical ticket.

This is one of many challenges Iger faces, and his worst enemy may be himself: will he be able to pull the licensing trigger and sell to Netflix on a non-exclusive basis? It’s an easy calculation, I suppose, if one is not the CEO, but with David Zaslav over at Warners seeming to embrace the style change, it might be a smart bet to think Iger himself will follow in his competitor’s footsteps.

The problem for Iger is that the price action of the stock is going to be tough to watch at times if he doesn’t make some bold moves…and no, he probably won’t be buying anything at the moment. This brings me to a last, brief point, a traditional one: as Disney navigates this complex time, with the stock still not above even $90, the parks may indeed become more important than ever. Last quarter, parks/experiences sales increased 17% to $7.8 billion with profit up 23% to $2.2 billion; Disney’s media/content reporting segment went up 3% for the top line at $14 billion but dropped over 40% to $1.1 billion…yes, all of that revenue generated a yield less than that of parks.

Hey, that’s Disney’s expertise area, after all. But the big conclusion from all of this is that one should not expect the turnaround to come over night, especially with the Hollywood guilds causing all kinds of accounting turmoil for the Mouse. Remember the company’s assets, though, and the idea that things will indeed turnaround over the longer term. Disney is therefore still a long-term buy around the lower end of the yearly range and on pullbacks. Will the $84 level be taken out? Very possibly, sure. But the stock will become more attractive to me if that happens. I bought some DIS last week, and will certainly do more buying in the very near future.

Disney is a great, iconic company that will benefit from cost-cutting and a new approach to streaming. Iger is going to have to learn to be a little tougher on creatives in terms of compensation packages (please, no more profligate overall deals for star talent) and will need to help the media conglomerates strike a balanced deal with the guilds – once the economics tilt more toward the Mouse, capital appreciation should return.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIS, NFLX, PARA, WBD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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