DIS reported second quarter earnings on May 7 and traded down nearly 10% over the course of the day. There were actually a number of positives. The company shifted full year earnings per share guidance to 25% growth from 20+%. DIS also affirmed that it expects to reach breakeven profitability across streaming businesses in the fourth quarter.
What seemed to bother investors most was that management stated that it expects “comparable” operating profit in the Experiences segment next quarter. In other words, no growth.
As we previously discussed, we, along with most investors, view the Experiences segment, which includes theme parks, cruises and consumer products, as the golden goose of the conglomerate. In 2023, Experiences generated approximately 70% of operating profit.
In the second quarter of 2024, Experiences generated very strong operating income growth of 12%. DIS still expects “robust operating income growth at Experiences for the full year.” But a number of factors are expected to get in the way of growth for the third quarter, including the timing of certain tech and media expenses, the timing of Easter, and pre-opening expenses associated with new cruise ships.
While these items generally seem to be one-off in nature, rather than indications of a trend, perhaps the most disconcerting statement, which likely drove most of the 10% decline in the share price, came from CFO Hugh Johnson. During the post-earnings conference call, he noted that “we are seeing some evidence of a global moderation from peak post-COVID travel.”
Combined with the unexpected blip in Experiences profitability next quarter, investors were clearly unhappy to hear any sort of negative messaging around the company’s healthiest business segment, even if management continues to signal strong long-term growth there.
Sum of the parts
Most sell-side analysts tend to value the company on a sum of the parts basis around $140 per share, applying what we view as reasonable multiples of operating income to the profitable business segments (Experiences, Sports and linear television).
A typical valuation metric for the streaming business, which is only now approaching breakeven profitability, is approximately three times revenue. For perspective, peer streaming competitor Netflix (NFLX) trades at more than ten times revenue (but of course is highly profitable with approximately 25% operating margins).
At $105 to $110 per DIS share, one could reasonably make the claim that the streaming business is implicitly valued now at zero.
Time to buy?
As we previously noted, the closer DIS gets to its late-2023 levels of $80 to $90 per share, the greater the chance of renewed activist intervention, which could possibly even involve a change of control. From a valuation and risk/reward perspective, DIS is becoming more interesting.
We regard DIS as a special situation investment, and it is not a Model Portfolio holding. However, for investors who appreciate the long-term value of the core Experiences business, like the optionality around streaming (with potential upside through margin improvement or maybe even a transaction), and see potential for further activist involvement, current levels represent an interesting entry point to develop a position in DIS. (Updated financials below.)
