Thematic evaluation
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The Walt Disney Co. (DIS)

October 15, 2024

Compared to: Comcast Corp. (CMCSA) | Warner Bros. Discovery, Inc. (WBD) | The Communication Services Select Sector SPDR Fund (XLC)

Our reasoning

Disney appears moderately undervalued based on its strong financial performance, valuable IP, and growth prospects in streaming and experiences segments. The company's valuation multiples are below industry averages despite its competitive advantages and improving profitability. While risks exist, they seem more than accounted for in the current valuation, which appears to be pricing in a scenario between the base case and pessimistic scenarios.

Key takeaways
  • The Walt Disney Co. (DIS) is a financially healthy company with strong revenue growth and improving profitability, but faces significant industry disruption and competitive pressures, particularly in its transition to DTC streaming.
  • DIS's DTC strategy is a critical priority, but it has come with substantial upfront costs and operational challenges that have weighed on profitability.
  • The company's financial health is strong, with a solid liquidity position and a conservative capital structure.
  • DIS is investing heavily in its parks and cruise ship businesses, with the expectation that these investments will drive accelerated growth in the coming years.
  • The company's future outlook is positive, as evidenced by the strong revenue growth, improving profitability, and increasing cash flow.
  • DIS's valuation is currently in line with its peers, but its future performance will depend on its ability to navigate the challenges of the evolving media and entertainment landscape.
  • The company's price performance has been mixed, with periods of outperformance and underperformance compared to its peers.
  • DIS's management team has a history of successful strategic execution, but the company faces challenges in navigating the rapidly evolving media and entertainment landscape.
Undervalued
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Evaluation summary

  1. Company Overview:

    • The Walt Disney Co. (DIS) is a global entertainment conglomerate with a diversified business model spanning media and entertainment production, distribution, and theme parks.
    • DIS generates revenue through various segments: Disney Entertainment (film, television, streaming), ESPN (sports-focused content), and Disney Parks, Experiences, and Products (theme parks, resorts, cruise line).
    • DIS targets a broad audience, particularly families and children, with its iconic intellectual property (IP) and diverse content offerings.
    • We will be using The Communication Services Select Sector SPDR Fund (XLC) as a benchmark for DIS's price performance and Comcast Corp. (CMCSA) and Warner Bros. Discovery, Inc. (WBD) as industry peers for comparative analysis.

  2. Financial Performance:

    • DIS has demonstrated consistent revenue growth, driven by the strength of its IP and parks business.
    • The company's profitability is strong, with high return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC).
    • DIS is focused on improving the profitability of its direct-to-consumer (DTC) business, with initiatives like password sharing and cost optimization expected to drive the business towards double-digit margins.
    • Compared to its peers, DIS has exhibited mixed performance, outperforming CMCSA and WBD in some periods but underperforming in others.

  3. Operational Efficiency:

    • DIS's asset utilization efficiency is improving, as indicated by the increasing ROA, ROE, ROIC, and gross profit margin.
    • The company is effectively controlling operating expenses, contributing to margin expansion.
    • DIS is generating more cash from its operations than it is reporting in net income, indicating strong cash flow generation.
    • The company is investing heavily in its parks and cruise ship businesses, with the expectation that these investments will drive accelerated growth in the coming years.
    • DIS's short-term liquidity position is strong, but its long-term liquidity position is weakening, as evidenced by the decreasing current ratio and quick ratio.
    • The company's financial leverage is low, as evidenced by the low debt-to-equity ratio and debt-to-EBITDA ratio.
    • Compared to its peers, DIS has exhibited moderate operational efficiency, with a mixed performance in key metrics like working capital management and asset utilization.

  4. Growth Opportunities:

    • DIS is expanding its market reach through strategic partnerships, acquisitions, and geographic expansion.
    • The company is investing heavily in its DTC streaming business, with a focus on content development, subscriber growth, and pricing power.
    • DIS is leveraging its strong IP and creative capabilities to drive growth across its various business segments.
    • The company's new NBA deal is expected to provide a substantial revenue boost starting in fiscal 2026.
    • DIS's management team has a history of successful strategic execution, but the company faces challenges in navigating the rapidly evolving media and entertainment landscape.

  5. Risks and Threats:

    • DIS faces significant industry disruption and competitive pressures, particularly in its transition to DTC streaming.
    • The company's DTC strategy has come with substantial upfront costs and operational challenges that have weighed on profitability.
    • Regulatory risks, including antitrust scrutiny and content quotas, pose ongoing challenges for DIS's global operations and distribution models.
    • Macroeconomic headwinds, such as inflation and recession, could further strain the company's costs and consumer demand for its products and services.
    • DIS's legal battles, including the securities class action and Hulu arbitration, introduce uncertainty and potential financial liabilities that could impact its financial condition.

  6. Valuation Analysis:

    • DIS's valuation metrics, such as P/E and EV/EBITDA, are currently in line with its peers, suggesting a fair valuation.
    • The company's strong revenue growth, improving profitability, and increasing cash flow are potential catalysts for future valuation growth.
    • However, the company's DTC strategy, regulatory risks, and macroeconomic headwinds are potential headwinds that could impact valuation.

  7. Price Performance:

    • DIS has consistently underperformed the Communication Services Select Sector SPDR Fund (XLC) over all the periods analyzed.
    • DIS has exhibited moderate volatility, generally lower than WBD but higher than CMCSA.
    • DIS's beta suggests that it is a moderately risky stock, with a sensitivity to market movements that is moderate compared to its peers.

  8. Future Outlook:

    • DIS's management team is bullish on the future of its streaming business, citing the strength of its content pipeline and the potential for further pricing power and subscriber growth.
    • The company expects the DTC business to be a significant earnings contributor in fiscal 2025, with the new NBA deal also providing a substantial revenue boost starting in fiscal 2026.
    • Analyst estimates for DIS's future performance are generally positive, with consensus trends indicating continued revenue growth and improving profitability.

  9. Summary:

    • DIS is a financially healthy company with strong revenue growth, improving profitability, and a conservative capital structure.
    • The company's DTC strategy is a critical priority, but it has come with substantial upfront costs and operational challenges that have weighed on profitability.
    • DIS faces significant industry disruption and competitive pressures, but its strong IP, creative capabilities, and management team provide a foundation for future growth.
    • The company's valuation is currently in line with its peers, but its future performance will depend on its ability to navigate the challenges of the evolving media and entertainment landscape.
Peer fundamentals 
Fundamentals
Insights
  • The Walt Disney Company is a diversified entertainment conglomerate facing significant industry disruption and competitive pressures, particularly in its transition to DTC streaming.
  • The company's DTC strategy is a critical priority, but it has come with substantial upfront costs and operational challenges that have weighed on profitability.
  • The company's financial health is strong, with a solid liquidity position and a conservative capital structure.
  • The company is investing heavily in its parks and cruise ship businesses, with the expectation that these investments will drive accelerated growth in the coming years.
  • The company's future outlook is positive, as evidenced by the strong revenue growth, improving profitability, and increasing cash flow.
Analysis
  • Revenue - Revenue growth is driven by the strength of its IP and parks business. - The company is seeing strong performance in its IP and parks business, which is driving revenue growth. - The company expects flattish revenue in Q4 2024 for the Experiences segment, with the weakness expected to last for a few quarters.
    • Profitability
      • The company's profitability is strong, as evidenced by the high return on assets, return on equity, return on capital, and return on invested capital.
      • The company's profitability is improving, as evidenced by the increasing gross margin, operating margin, and net margin.
      • The company is focused on improving the profitability of its direct-to-consumer (DTC) business, with initiatives like password sharing and cost optimization expected to drive the business towards double-digit margins.
    • Liquidity
      • The company's liquidity position is weakening, as evidenced by the decreasing current ratio and quick ratio.
      • The company's short-term liquidity position is strong, as evidenced by the increasing operating cash flow.
    • Solvency
      • The company's financial leverage is low, as evidenced by the low debt-to-equity ratio and debt-to-EBITDA ratio.
      • The company's long-term solvency is strong, as evidenced by the low debt-to-equity ratio and debt-to-EBITDA ratio.
    • Operational Efficiency
      • The company's asset utilization efficiency is improving, as indicated by the increasing return on assets, return on equity, return on capital, and return on invested capital.
      • The company is effectively controlling operating expenses, which is contributing to the margin expansion.
    • Cash Flow Analysis
      • The company is generating more cash from its operations than it is reporting in net income.
      • The company is becoming more efficient at generating cash from its operations.
      • The company is investing heavily in its parks and cruise ship businesses, with the expectation that these investments will drive accelerated growth in the coming years.
      • The company is focused on improving the profitability of its DTC business, with initiatives like password sharing and cost optimization expected to drive the business towards double-digit margins.
    • Risk Factors
      • The company's liquidity position is weakening, which could pose a risk to its short-term financial health.
      • The company's DTC strategy is a critical priority, but it has come with substantial upfront costs and operational challenges that have weighed on profitability.
      • The company faces a complex and rapidly evolving landscape that requires nimble strategic execution to maintain its position as a leading global entertainment powerhouse.
    • Future Outlook
      • The company's future outlook is positive, as evidenced by the strong revenue growth, improving profitability, and increasing cash flow.
      • The company expects the DTC business to be a significant earnings contributor in fiscal 2025, with the new NBA deal also providing a substantial revenue boost starting in fiscal 2026.
      • The company is bullish on the future of its streaming business, citing the strength of its content pipeline and the potential for further pricing power and subscriber growth.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-14)
The Communication Services Select Sector SPDR Fund (XLC)
  • Performance Comparison:
    • The Walt Disney Co. (DIS) has consistently underperformed The Communication Services Select Sector SPDR Fund (XLC) over all the periods analyzed. This underperformance is particularly pronounced over longer periods, with DIS significantly lagging behind XLC in the 2-year and 3-year returns. This suggests that DIS has struggled to keep pace with the broader communication services sector.
    • The underperformance of DIS can be attributed to various factors, including the company's exposure to the cyclical entertainment industry, which has been impacted by the COVID-19 pandemic and changing consumer preferences. Additionally, DIS has faced challenges in its streaming business, with increased competition from other streaming services.
  • Risk and Return Analysis:
    • While DIS has underperformed XLC in terms of returns, it has also exhibited higher annualized volatility. This suggests that DIS is a riskier investment than XLC, with its price movements being more erratic and unpredictable.
    • The higher volatility of DIS is reflected in its larger maximum drawdown, which reached 60.72% compared to XLC's maximum drawdown of 46.65%. This indicates that DIS is more susceptible to significant price declines during periods of market stress.
  • Risk-Adjusted Performance:
    • The Sharpe Ratio analysis further reinforces the notion that XLC offers better risk-adjusted returns than DIS. XLC consistently exhibits a higher Sharpe ratio, indicating that it has generated higher returns for the level of risk taken.
    • DIS's beta values, while generally fluctuating around 1, have been slightly higher than XLC's, suggesting that DIS is slightly more sensitive to market movements. This implies that DIS's price movements are likely to be more volatile than XLC's during periods of market volatility.
  • Overall Assessment:
    • The analysis suggests that DIS has underperformed XLC in terms of both absolute and risk-adjusted returns. DIS has exhibited higher volatility and a larger maximum drawdown, indicating a higher risk profile. While DIS's beta values have been trending downwards in recent quarters, suggesting a potential decrease in its risk profile, it still remains a riskier investment than XLC.
    • Investors considering DIS should carefully weigh the potential for higher returns against the increased risk associated with the stock. The company's exposure to the cyclical entertainment industry and its challenges in the streaming business are key factors to consider. XLC, on the other hand, offers a more diversified exposure to the communication services sector, with a lower risk profile and better risk-adjusted returns.
Peers Price History(as of 2024-10-14)
Comcast Corp. (CMCSA)Warner Bros. Discovery, Inc. (WBD)
  • Performance Comparison:
    • DIS has exhibited a mixed performance history compared to its peers. While it has outperformed both CMCSA and WBD in the 1-year and 2-year periods, it has underperformed in the 3-year, 6-month, and 3-month periods. This suggests that DIS's performance is not consistently better than its peers.
  • Risk and Return Analysis:
    • DIS has provided higher annualized returns than WBD in all periods, but lower returns than CMCSA in the 2-year and 3-year periods. This indicates that DIS's returns are not consistently higher than its peers.
    • DIS has exhibited moderate volatility, generally lower than WBD but higher than CMCSA. This suggests that DIS is a moderately risky investment compared to its peers.
    • DIS has experienced the largest maximum drawdown of 60.72% on 10/04/2023, compared to 52.11% for CMCSA on 10/11/2022 and 91.32% for WBD on 08/12/2024. This indicates that DIS has a higher risk profile than CMCSA but a lower risk profile than WBD.
  • Risk-Adjusted Performance:
    • DIS's Sharpe Ratio has generally been lower than CMCSA's, but higher than WBD's. This suggests that DIS's risk-adjusted returns are not consistently better than its peers.
    • DIS's beta suggests that it is a moderately risky stock, while CMCSA's beta suggests that it is a less risky stock, and WBD's beta suggests that it is a more risky stock. This indicates that DIS's sensitivity to market movements is moderate compared to its peers.
  • Overall Assessment:
    • DIS has exhibited a mixed performance history, with periods of outperformance and underperformance compared to its peers. Its volatility is moderate, suggesting a moderately risky investment. While its Sharpe Ratio is generally lower than CMCSA's, it is higher than WBD's, indicating that its risk-adjusted returns are not consistently better than its peers. DIS's beta suggests that it is a moderately risky stock, with a sensitivity to market movements that is moderate compared to its peers.
    • The recent trends in DIS's volatility, Sharpe Ratio, and beta suggest that it may be becoming more volatile and less attractive on a risk-adjusted basis. However, it is important to note that these are just recent trends and may not be indicative of future performance.
Peers Fundamentals(as of 2024-06-30)
Comcast Corp. (CMCSA)Warner Bros. Discovery, Inc. (WBD)

  1. Market Position and Size:

    • DIS is the largest company in the peer group, with a market cap more than eight times larger than WBD and slightly larger than CMCSA. This size advantage gives DIS significant leverage in the industry, allowing it to invest in new ventures, acquire other companies, and negotiate favorable terms with suppliers and distributors.
    • DIS generates significantly more revenue, EBITDA, and net income than its peers, reflecting its strong market position and economies of scale.

  2. Profitability and Efficiency:

    • DIS's profitability metrics are generally lower than those of its peers and the industry average, suggesting potential challenges in cost structure, pricing power, or market segment competitiveness.
    • DIS's return on assets, return on equity, return on total capital, and return on invested capital are all lower than those of its peers and the industry average, indicating potential inefficiencies in utilizing assets and capital to generate profits.

  3. Financial Health and Stability:

    • DIS's liquidity and solvency metrics are generally lower than those of its peers and the industry average, raising concerns about its ability to meet short-term obligations and potential vulnerability to financial distress.
    • DIS's balance sheet structure is generally in line with its peers, considering their relative company sizes, indicating that its capital structure and asset allocation are not significantly different from its competitors.

  4. Valuation and Market Perception:

    • DIS's valuation metrics are generally higher than those of its peers and the industry average, suggesting that the market may be placing a premium on DIS's brand recognition, content library, and future growth potential.
    • The market's perception of DIS is positive, as reflected in its higher valuation metrics despite lower profitability and efficiency metrics.

  5. Cash Flow and Capital Management:

    • DIS's cash flow generation strength is lower than its peers, considering their market caps, indicating potential challenges in converting earnings into cash flow.
    • DIS's capital allocation strategies are not significantly different from its peers, as evidenced by its balance sheet structure.

  6. Growth and Future Prospect:

    • DIS shows consistently higher growth in profitability and cash flow metrics compared to its peers, suggesting potential market share gains and operational efficiency improvements.
    • DIS's core business operations are growing at a slower pace than its profitability and cash flow metrics, indicating a potential focus on improving efficiency and financial performance rather than expanding core business operations.
    • DIS's growth rates have been consistently increasing in profitability and cash flow metrics, but decreasing in revenue and assets, suggesting a potential shift towards efficiency improvements and a focus on existing operations.

  7. Potential for Investment:

    • DIS's investment attractiveness is mixed. Its strong brand, diversified business model, and cash flow generation provide a solid foundation for growth.
    • However, its lower profitability, efficiency, and liquidity compared to its peers raise concerns about its financial stability and ability to manage its obligations effectively.

  8. Key Risks and Considerations:

    • DIS's lower profitability and efficiency metrics compared to its peers and the industry average pose a risk to its long-term financial performance.
    • DIS's lower liquidity and higher debt levels compared to its peers and the industry average raise concerns about its financial stability and ability to manage its obligations effectively.
    • DIS's slower revenue growth compared to its peers suggests that it may be facing challenges in expanding its core business operations.

  9. Overall Assessment:

    • DIS is a large and established company with a strong brand and a diversified business model. It has a significant market share and generates significant cash flow.
    • However, DIS faces challenges in profitability, efficiency, and liquidity compared to its peers and the industry average.
    • Investors should carefully consider these factors before making an investment decision.