Disney: Can The Magic Return For Shareholders? (NYSE:DIS)

The Walt Disney Company (NYSE:DIS) shares were trading for just over $200 in 2021 and have since fallen to around $100 currently. That’s a huge drop of roughly 50%, especially for a big-name company with very strong brand recognition. I want the Disney story to work out for shareholders and I hope Bob Iger (the CEO) can take shareholders back to the “Magic Kingdom”, but I do see some challenges along the way. I recently went to Disneyland with my family and stayed at the Disneyland Hotel and went to both parks. This visit prompted me to think more about Disney as an investment since I was just immersed in the Disney experience.

I last wrote about Disney in 2013, suggesting it was a buy, but only on pullbacks. Once again, we just had a big pullback of about 10% in Disney shares after the company reported Q2 2024 results. Let’s take a closer look at Disney now:

The Chart

As the chart below shows, Disney shares have been in a general uptrend for the past decade or so but there’s been some big ups and downs along the way. What I want to point out in this long-term chart of Disney, is the 200-week simple moving average, which is represented by the brown line. What stands out to me is that over the past 12 years or so, this stock has never been at or below this level until just recently, as it went under this level briefly late in 2023. The 200-week simple moving average is right around $85 right now, and it has bounced off this level. With the stock at around $103 right now, I think it is attractive to buy, as it is still not too far from what has been a historically rare buying opportunity.

I think it makes sense to look at a shorter-term chart as well. As the chart below shows, Disney shares had a solid rally in 2024, and went over $120 per share, but declined after the company reported Q2 2024 earnings. I think this represents an attractive opportunity to start building a new position or adding to an existing position. The 50-day moving average is about $113, and the 200-day moving average is around $96.42. I am buying some shares at the current price of around $103, but will get more aggressive if the stock goes below $100 and towards the 200-day moving average.

Earnings Estimates And The Balance Sheet

Analysts expect Disney to earn $4.75 per share in 2024, on revenues of $91.58 billion. For 2025, earnings per share jumps to $5.46, with revenues coming in at $96.2 billion. For 2026, Disney is expected to earn $6.10 per share, on revenues of $100.58 billion. This is solid growth in earnings, and that could help expand the price-to-earnings multiple at some point.

As for the balance sheet, I am not as happy. Disney has around $6.64 billion in cash and $46.3 billion in debt. Having this much debt does not feel magical to me, and I view this debt load as a weight on profits and as a weight on the valuation of the company. Things are fine with the economy right now, but if we get a slowdown or into a recession, investors will be even more cautious about how they value companies with large debt loads. I would like to see Disney sell some non-core assets and pay down this debt. It is not cheap to have debt now and high debt loads keep many investors away.

Bob Iger And Nelson Peltz

Nelson Peltz is an activist shareholder who has been pushing for change at Disney, and it seems like some of his ideas and the pressure he is putting on Bob Iger might be registering. Some Disney fans have been upset and have felt that Disney has gone “woke” with movies that are being created with a political or other agenda. Nelson Peltz criticized some Disney movies as having gone too far in this area, and Bob Iger seems to understand that Disney has to focus on great storytelling and not messaging. A recent NBC article details Bob Iger’s desire for Disney to make movies that entertain and not ones that are about sending messages. Hopefully, this will help future results because Disney has had its recent share of box office losers.

Bob Iger came back to Disney to be CEO again, and he is set to retire once again in 2026. That doesn’t leave a lot of time to accomplish everything that is needed, but I am sure that Bob Iger would like to have Disney back on track in every way before he leaves the company. I’m also sure Nelson Peltz wants his activist campaign to be instrumental in creating shareholder value for himself and others. Even though Nelson Peltz did not get what he wanted in the recent boardroom fight with Disney, he has a voice that will be heard whether Bob Iger likes it or not.

M&A Potential

Disney owns ABC Television Network and since network TV viewership continues to shrink, it might make sense for this asset to be sold. There have been offers for ABC for $10 billion by Allen Media Group and other parties like Nexstar Media Group have reportedly expressed interest in buying the network. According to this LA Times article, Disney does not appear to be ready to decide on the sale of this asset, but when and if it does, I believe it could be an upside catalyst for the stock. Disney could use the proceeds to strengthen the balance sheet by paying down debt.

It could also use some of these funds to buy the remaining stake in Hulu. The proceeds from the sale of ABC could obviously be beneficial in terms of finances, but I think it would also make Disney a more attractive and streamlined asset for investors as well as for companies that might be potential suitors of Disney. I feel that Disney has too many moving parts right now and too much debt, so selling ABC Television Networks could be a good move and make Disney more of a pure play with the remaining business operations.

There has been speculation for years that Apple might want to buy Disney, and there continues to be strong arguments for and against a potential deal. One media analyst believes that if Apple wants to get serious about content, it could still move to buy Disney. I don’t think a deal is as likely now, but after a decision is made on ABC and Hulu and when we get closer to Bob Iger’s potential retirement in 2026, announcing the sale of Disney might be just the perfect exit strategy and a crowning achievement.

Valuation

Late last year, an analyst at Bernstein said Disney was a buy because it was the “only credible challenger to Netflix, Inc. (NFLX)”. With this in mind, I think it makes sense to look at the valuation of these companies. As I mentioned before, I think the comparisons to Netflix will be even more sensible when and if Disney sheds some assets such as the ABC Television Network. Netflix is currently trading for about 34 times earning estimates for 2024. Netflix has a market capitalization of about $268 billion, and around $38 billion in annual revenues. On the balance sheet, it has about $16.51 billion in debt and around $7.05 billion in cash.

By contrast, Disney has a market capitalization of about $188 billion (with annual revenues of about $91.5 billion, which is almost triple the revenue of Netflix). It is trading for just below 22 times earnings for 2024, and only around 16 times earnings estimates for 2026. This is a huge valuation gap, and it shows potential for Disney to close this gap, if it streamlines, increases growth, reduces debt, and becomes more of a pure play in streaming and entertainment.

The Dividend

Disney suspended the dividend when Covid hit, but it recently reinstated the dividend, and we are possibly going to see it increase over time. It currently pays $0.30 per share annually.

Potential Downside Risks

I believe the debt load that Disney has is a potential downside risk, and I think it already is weighing on the valuation of this company. Fewer people are watching network TV such as ABC and this is a long-term problem for that division and a potential downside risk to consider.

A recession could have a big impact on theme park attendance and on other Disney products. Between ticket prices, hotel rooms, and food, it’s easy for a family of 4 to spend well over $1,500 per day to go to a Disney Park, so this is a big discretionary expense for many families that would likely be cut from the family budget if times get tough.

I also am concerned about the Disney Shanghai Resort in China because tensions between the US and China seem to be getting worse, and the Chinese Government has recently been pushing for more Chinese technology consumption when it comes to smartphones and other products. Disney has also had some issues with movie releases in China in the past.

In Summary

I think Disney has challenges and I also believe it needs to streamline and pay down debt. But I also see a potentially big opportunity to buy at a valuation that is way below the valuation of Netflix. I also think this is an intriguing buying opportunity since Disney shares have (except for in late 2023) never traded at the 200-week simple moving average and right now, it is not too far above that level. I think Bob Iger’s renewed focus on making movies that are about great storytelling instead of messaging could be a positive for future movie releases.

In addition, the Disney brand is so well known around the world and that makes it a very valuable asset. Disney shares traded for about $200 when investors were viewing the growth prospects of this company more positively. I think that positivity and a rebound back to $200 is possible for Disney, so I am buying now and will continue to add on any weakness.

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