waltz disney (SAY (opens in a new tab)$99.90) the stock plunged on Wednesday after the media conglomerate’s fourth fiscal quarter results missed analysts’ estimates and management warned of slower growth going forward.
Disney stock, a component of the Dow Jones Industrial Average, lost more than 11% shortly after the opening bell. Disney, which reported results on Tuesday evening, added that it would cut content spending amid losses at its strategically important Disney+ streaming business.
A number of analysts reacted to the disappointing results by lowering their price targets on Disney shares, but most of Wall Street stuck to its bullish recommendations.
Sign up for Kiplinger’s free email newsletters
Enjoy and thrive with Kiplinger’s best expert advice on investing, taxes, retirement, personal finance and more – straight to your email.
Profit and thrive with the best expert advice from Kiplinger – straight to your email.
Disney stock gets a consensus Buy recommendation, and with high conviction, to boot. Of the 29 analysts issuing opinions on Disney stocks tracked by S&P Global Market Intelligence, 18 rate it Strong Buy, seven say Buy and four say Hold.
Their average price target, however, fell to $136.01 from $140.08 on Tuesday. And yet, with Disney shares down sharply on bad earnings news, the new street price target gives DIS an implied upside of more than 50% over the next 12 months or so. That’s up from an implied rise of around 40% just 24 hours ago.
For the record, Disney posted adjusted earnings per share (EPS) of 30 cents, well below analysts’ estimate for an adjusted EPS of 56 cents, according to S&P Global Market Intelligence. Revenue hit $20.2 billion versus Wall Street’s forecast of $21.4 billion.
Disney management blamed the shortfalls on several factors, including lower content sales due to lower theatrical movie releases in the quarter, weaker-than-expected results at theme parks and weak revenue growth in the media division.
But most alarming for traders and investors was Disney’s growth forecast for the current fiscal year.
“Assuming we don’t see a material change in the macroeconomic climate, we currently expect the company’s total fiscal 2023 revenue and segment operating income to both increase to one high single-digit percentage rate from fiscal year 2022,” Chief Financial Officer Christine McCarthy said. a conference call with analysts.
The street was looking to increase its revenue by around 14% in the current fiscal year. Operating profit is expected to increase by approximately 17%.
Profit and revenue losses are bad news, but equities, being forward-looking, are generally much more sensitive to any reduction in a company’s outlook. That’s why Disney stock is taking a beating following its report.
Nevertheless, analysts remain convinced that it is time to buy the decline in Disney shares. And they certainly seem to have valuation on their side. DIS stock changes hands at just 17.3 times analysts’ FY2024 EPS estimate. This is an undeniable price to pay for a company that expects to generate average annual EPS growth of more than 33% over the next three to five years.
For one, though the streaming or direct-to-consumer (DTC) business is still bleeding red ink, Disney bulls say it’s only a matter of time before the company be able to swing the division back to profitability by introducing an ad-supported option.
“Disney+’s ad-supported level will be a game-changer for its subscriber and revenue growth, and given Disney’s falling average revenue per user growth and rising revenue losses, exploitation DTC, its launch cannot come soon enough,” writes Third Bridge analyst Jamie Lumley. “Disney is in a better position than Netflix from an operational standpoint because they already have a lot of ad technologies and infrastructure in place through the Hulu and ABC network channels.”
At Morgan Stanley, analyst Ben Swinburne rates Disney stock at Overweight (equivalent to Buy), saying lower streaming losses and continued growth in the parks segment may help EPS roughly double in size. here fiscal 2025.
It’s true that anyone considering committing new capital to Disney stocks would do well to remember that valuation only tends to work over the long term. That said, there’s no denying that stocks haven’t been this cheap in a long time. Over the past five years, DIS has traded on average nearly 38 times Street’s EPS forecast, according to Refinitiv Stock Reports Plus.
In other words, at current levels, Disney stock is offering more than a 50% discount to its historic forward price-earnings multiple. This is an attractive relative valuation, which suggests that stocks have been beaten beyond reason.
Disney stock is now down more than 40% year-to-date. And while it’s impossible to say when the pain might end, it’s rarely been on sale like this. Patient investors might want to take a cue from the abundance of bulls on the street and pick up this name while its relative valuation remains so deeply depressed.