Welcome to the (new) Pit Report!
Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Andrew Giovinazzi will then finish out the week with a volatility breakdown.
Have a stock YOU want us to review? Email my team here.
Hey Traders,
Disney is a polarizing company.
There are people who put how they feel about some of the corporate messaging over the actual execution … although some would argue the two are intertwined.
I am, as always, going to leave politics at the door and just look at how the company is executing … what they are doing right, how they can grow and what the challenges lie ahead for Mickey and co..
The Good
The parks are back.
Disney World is basically back from the covid lows and is seeing major increases in foot traffic.
The company is doing a much better job of recognizing its “high spenders” that come to the parks and maximizing those visitors’ experience – as well as Disney’s wallet.
As of November, Disney+ has more than 164.4 million subscribers, with customers cutting the cord, which is hurting ESPN badly.
The more subscribers to Disney Plus the Mouse can get, the more upgrades to Hulu and ESPN+ that Disney can bundle. This is the future of Disney revenue growth.
Say what you will about the movies, but Star Wars series content has been well received by fans.
While the MCU may have played itself out with Robert Downey Jr. and co., but the upcoming Deadpool movie with the return of Wolverine is likely to do extremely well. Avatar did very well in the box office, too.
The company needs to fix the Star Wars movie brand, but if they can pull the right levers, there is serious upside there.
Looking at the fundamentals, the cash flow per share of $4.77 is not bad and the company has pretty nice gross margins.
Finally and most importantly is Bob Iger. It is clear that Bob Chapek was not up to the task for Disney, and the board of directors did not just sit back … they took action and brought in a man with a proven track record of execution with the Disney brand.
It’s early, but the stock is already trading like there are signs Iger is turning the company around.
This brings us to …
The Bad
The growth in Disney rests entirely on streaming and fixing the movie business.
The Disney brand cartoons have been universally panned and absolute failures of late.
Strange World lost over $100 million.
Disney cannot afford to keep losing money on bad cartoons. Because a bad cartoon leads to bad merchandise sales – fewer shirts, toys, lunch boxes … the whole nine yards.
This is why fixing Star Wars is so important.
A good movie will lead to huge merchandise sales. The end of the last Star Wars trilogy did not leave viewers wanting more. Say what you will about the Ewoks, but those cute little buggers sold a ton of plush toys.
Then there is streaming …
Disney needs to up the content game and get original. They cannot just keep pumping out Star Wars and MCU shows and expect the brand to grow.
The network lacks buzz shows like White Lotus or You. They do not have documentaries that adults want to watch like the Pamala Anderson doc that just dropped.
If the network sticks to MCU, Star Wars and kid shows, there is only so far the streaming service can grow – and it won’t attract the sought after 18-45 demographic that advertisers (yes, they will eventually have advertising, too) want to be in front of.
Their customers are parents that spend on their kids, the kids and comic book fans. That is a great audience but has its limitations.
The company has a PE in the 60s that is incredibly high and well above the historic numbers. If Disney cannot grow into that PE, it is a $60 stock, not $120.
Disney has a higher PE than AAPL, MSFT and even TSLA. That is saying something.
I think there are better places to put your money in the short term.
If the stock gets below 90, it is probably a buy, but heading into their earnings on Feb. 8, the future is far too cloudy … and not with a chance of meatballs.
One final note, coming from a Muppet fan, the company needs to figure out what to do with The Muppets. It’s too good of a brand to sit on …
Your Only Option,
Mark Sebastian