Growth Stocks: The Walt Disney Company

At the close of Wall Street, The Walt Disney Company (DIS.US) management team is expected to release financial results covering the last quarter of the company's fiscal year 2022. While the market has been challenged this year amid fears associated with rising inflation and rising interest rates, some companies have been hit harder than others. This particular firm is a great example of that, as evidenced by the fact that the stock is down 36% year to date. From a purely fundamental perspective, The Walt Disney Company has been doing very well this year. But of course, that scenario could change from one quarter to another. And ahead of the fourth quarter earnings release, there are a few items investors should pay particular attention to. Although the market may be able to ignore strong performance as it has for most of this year, eventually the tide should turn for the better as strength persists.

Disney+ data will be very important

Although The Walt Disney Company is a true entertainment conglomerate, with many large companies under its parent, there is no denying that the most important part of the company right now is the streaming part of the business (Disney+). This has been a source of significant growth for the company and has the potential to eventually generate strong recurring cash flows for the business. Because of this, investors should pay attention to the subscriber numbers and other data that the company publishes results.

source: The Walt Disney Company

In general, the streaming market has also faced some challenges this year. For example, giant Netflix (NFLX.US) reported subscriber declines in two different quarters this year before posting strong results recently. With consumers pressured by high costs and a smorgasbord of streaming services, there have been substantial questions about the ability of certain providers in this market to meet their long-term goals. Even The Walt Disney Company has been affected by this. When the company presented results for the third quarter of this year, it said it was lowering its 2024 target for a global number of Disney+ subscribers between 215 million and 245 million compared to the previous expected range of between 230 million and 260 million. A drop of 5.7%.

While this may be disappointing, it is worth noting that it would still imply significant growth in the coming quarters. At the end of the third quarter of this year, Disney+ had 152.1 million subscribers. That is, an increase of 14.4 million, or 10.5% more, compared to the 137.7 million that were in their guidance just a quarter earlier. It would be interesting to see if the platform can achieve continued strong growth given that economic conditions appear to be worse now than they were three months ago. But it's not just Disney+ that investors should pay attention to. ESPN+ is another of the company's streaming services. In the last quarter, the service had 22.8 million subscribers. That was 500,000 more than was reported in the second quarter of this year. Meanwhile, Hulu reported 46.2 million, an increase of 600,000 compared to 45.6 million reported just a quarter earlier.

source: The Walt Disney Company

The number of subscribers reported by the company is incredibly important. But it is not the only thing that investors should take into account. They should also pay attention to the revenue per user per month generated by each service. In the third quarter of this year, for example, Disney+ earned $4.35 per user per month. That was flat on a quarterly basis and was up from the $4.16 per user per month reported a year earlier. ESPN+ saw prices of $4.55 per user per month. That's down from the $4.73 per month reported just a quarter earlier. And Hulu saw prices fall from $19.58 per user per month in the second quarter of this year to $19.41 per user per month in the third quarter. What will be really interesting is how this all stacks up when you consider that, as part of its third-quarter earnings release, The Walt Disney Company announced plans to increase revenue from its offerings. For example, the ad-free version of Disney+ increased from $7.99 per month to $10.99 per month in the US The company also introduced an ad-supported version for $7.99 per month. Other significant changes were also announced, with plans to introduce such changes over time. Add to that this continued international expansion into markets that are generally priced lower than those in more developed markets, and it remains to be seen what kind of pricing and subscriber growth the company's various platforms can achieve, depending on the country.
 
Recovery is important

We have already indicated that the transmission part of the business is the most vital at this time. That said, there are parts of the company that, as of the third quarter of this year, were still reeling from the COVID-19 pandemic. The recovery trajectory of these various parts of the business will go a long way in determining whether the business has returned to full health and, if not, how long its recovery might take.

When talking about the most affected areas, the first thing that comes to mind is the Parks and Experiences part of the company. In the third quarter of this year, the company's parks experienced traffic increases of 69% in relation to the same period of the previous year. Domestically, that number was much higher at 93%, while the company's international operations totaled 17%. The occupancy rate of national hotels in the parks was 90% compared to 50% a year earlier, while in international markets it stood at 61% compared to 20% the previous year. It is safe to say that there will continue to be a significant disparity between domestic and international operations. Due to the recent development of the Shanghai Disneyland which was forced to close due to COVID.

In what could be a good sign for shareholders, the Directorate announced price increases earlier this year for its national parks. While the lower end of the $104 price range for Disneyland has remained unchanged since 2019, there are fewer and fewer days when this price is available. By comparison, a one-day ticket in California that allows entry to a park during peak seasons like Christmas has risen from $164 to $179, or 9.1%. If you add up the difference between Disneyland and Disney California Adventure, that costs an extra $65 compared to the extra $60 it used to cost. These are just some of the examples of price changes that the company has pointed out. While it's painful for those who want to visit the facility, it could be a positive because it could be a response to recent strong attendance numbers.

source: The Walt Disney Company

It will be very interesting to see how the financial side of the situation turns out. To put this in perspective, assuming that in the third quarter of this year the company's Parks and Experiences operations posted revenue of $6.21 billion. That topped the $3.18 billion reported a year earlier and the $329 million reported in the third quarter of 2020. It was even higher than the pre-pandemic fiscal year of 2019 when the company reported sales of $5.55 billion. A similar trend is likely to be seen this time. Note that in the last quarter of the company's fiscal year 2021, these operations reported revenue of $4.170 million. That compares to the $1.410 million reported at the same time in fiscal 2020. And with these revenue figures will also come significant operating income figures. A similar trend can be seen on that front, with significant differentiation between domestic and international operations.

source: The Walt Disney Company, *$ in millions.

Of course, the Parks and Experiences part of the company is not the only part that has been significantly affected by COVID-19. We should also pay attention to the company's theatrical distribution business. In the third quarter of this year, revenue of $620 million exceeded the $140 million reported a year earlier and the $51 million reported in the third quarter of 2020. As for the fourth quarter, revenue in fiscal 2021 was of $640 million. That is significantly higher than the $72 million reported in the last quarter of 2020. However, at the same time, it was still down from the $1,360 million experienced in the last quarter of 2019.
 
Continuous focus on key metrics

The last but not the least important point that investors should pay close attention to would be the fundamental performance of the company. Or what is the same, the perspective of cash flows. Last year, the company's fourth quarter was especially attractive, as the company generated cash flow of $2.61 billion. That was higher than the $1.47 billion reported just a quarter earlier. What's really interesting is that in the third quarter of this year, the company reported an operating cash flow of $1.92 billion. This suggests we could have a fairly positive final quarter this year, especially if the streaming business is doing well and the parts of the company that were hit hardest by the COVID-19 pandemic also show improvement.

source: The Walt Disney Company

In addition to serving as a measure of value to the business, the other reason it's important to look at operating cash flow is because as investors, we're interested in whether or not the business will use it to reduce debt. After all, in four of the last five quarters, management has done well to reduce net leverage. At the end of the third quarter, total leverage was $38,640 million. And in the last quarter of 2021, it was slightly less than $38.45 billion. Although we cannot claim that The Walt Disney Company is over-indebted, it is always good to see a decrease in debt, as it ultimately reduces risk for investors.

Investors should also pay attention to the data on the cover, that is, the income and profits. Analysts currently forecast revenue of $21.44 billion. That would represent a significant increase over the $18.53 billion the company generated in the fourth quarter of its 2021 fiscal year. Earnings per share, meanwhile, should be $0.34 and adjusted earnings per share $0.56. By comparison, the company generated a loss per share in the last quarter of last year of -$0.39. In absolute dollar terms, the company's net loss in the fourth quarter of last year amounted to $710 million. If the analysts are right this time, the company's net income for the quarter should total $619.8 million, with adjusted profit of $1.02 billion.

source: The Walt Disney Company

Technical analysis

The graphic situation of DIS.US is framed within a range, with lows at $90-$91 per share and highs at the resistance of $120 per share. Although in the short term the bearish guideline pressures the price to return to its lows, it is possible that the next results will consolidate a lateral range that invalidates the bearish guideline on the stock.

source: xStation. DIS.US (W1)
 
Conclusions

The markets are in a difficult situation right now. Investors are worried about what the future holds. But there are companies like The Walt Disney Company that project resilience in the future and in this quarter the company could remain positive. However, the quarter as a whole is unlikely to be perfect. But as long as the company can reduce some negatives like the ones we've mentioned, The Walt Disney continues to offer interest as soon as the market finds its bottom.

Darío García, EFA
XTB Spain