Bear of the Day: Disney (DIS)

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Disney (DIS) reported their fourth quarter for FY20 last week and the recovery from COVID-19 impacts appears to have a ways to go.

The Walt Disney empire reported an adjusted loss of 20 cents per share, beating the analyst consensus by a good amount, but far below year-ago EPS of $1.07.

EPS for the year decreased to $2.02 from $5.76 in the prior year. On the top line, revenues decreased 23.1% from the year-ago quarter to $14.71 billion.

All told for the September quarter, the coronavirus pandemic affected Disney’s segmental operating income by $3.1 billion. The most significant impact was at the Parks, Experiences and Products segment where, since March, theme parks and resorts have been closed or operating at significantly reduced capacity and cruise ship sailings have been suspended.

Obviously the Studio Entertainment segment has been dealt a huge blow as well with movie studio operations and theater revenues still in shut-down mode.

The company report and outlook caused analysts to further lower their estimates for the new fiscal year, with the Zacks EPS Consensus dropping from $2.95 to $2.73.

Yet, DIS shares rallied strongly last week after their report on Thursday, holding on to gains from the big Nov 9 "Pfizer vaccine rally."

That's because despite lowering estimates and pushing DIS stock into the cellar of the Zacks Rank, many analysts were encouraged by several aspects of Disney's business, strong brands and growth prospects into a re-opening economy.

Brand Strength and New Growth

The Media and Networks, Parks and Experiences, and Direct-to-Consumer segments all posted stronger revenue and operating profit than anticipated.

And if ever there was an entertainment company that could adapt during a global crisis, it's clearly this one.

Disney CEO Bob Chapek noted "The real bright spot has been our direct-to-consumer business, which is key to the future of our company, and on this anniversary of the launch of Disney+ we’re pleased to report that, as of the end of the fourth quarter, the service had more than 73 million paid subscribers – far surpassing our expectations in just its first year.”

This result was up from 57.5 million subscribers at the end of the previous quarter, representing over 35% sequential growth.

Media Networks, which comprise 49% of revenues, grew 10.8% year over year to $7.21 billion. This includes revenues from Cable Networks which increased 11% to $4.72 billion while Broadcasting revenues were up 10% year over year to $2.49 billion.

Analysts Scramble to Raise Targets

There are a few things to keep in mind about analyst price targets. First, often they are competing with each other to grab headlines, even if they all use discounted cash flow (DCF) models.

Second, one has to wonder how many felt compelled by the Pfizer vaccine news to err on the side of Disney innovation and creativity into a re-opening economy. Still, it's good to understand their rationale for the upgrade. Here are some analyst notes that stood out to me…

Goldman Sachs analyst Brett Feldman raised the firm's price target on DIS to $156 from $142. "Disney continues to exhibit better than expected momentum with its pivot towards direct-to-consumer streaming video," Feldman told investors in a research note. He sees this continuing as the company launches new markets and new services, and given that Walt Disney World is operating at 35% capacity, management commentary that they are seeing strong demand for the available reservations supports a "rapid recovery in its Parks business post-vaccine."

Bank of America analyst Jessica Reif Ehrlich raised her price target on DIS to $166 from $146 following Q4 results that were significantly better than expected. Based on Disney's "spectacular DTC trends" she anticipates demand for Disney+ will remain strong. Ehrlich sees the company's upcoming analyst day, additional Disney+ rollouts, theme park re-openings and the resumption of feature film releases as near-term catalysts.

RBC Capital analyst Kutgun Maral upgraded Disney to Outperform from Sector Perform with a price target of $170, up from $124. The stock offers investors "unique exposure" to a recovery play supported by a "compelling" COVID hedge through its streaming service, along with its "attractive" underlying businesses like Parks, Consumer Products, and the Studio. Mural adds that Disney's near-term results may remain "noisy" with headwinds from the pandemic looking as far from over, but he is encouraged by the company's "operational green shoots" and continued execution on cost management.

Wells Fargo analyst Steven Cahall raised his price target on Disney to $155 from $136, but maintains an Equal Weight rating on the shares. Q4 results handily beat estimates due to better operating income at Media, Parks margin management and DTC exceeding company guidance. But he did note that "disruptions make comparability difficult." Cahall believes Disney+ is likely on its way to more than 100 million subscribers, and even feels it is "non-controversial" to suggest medium-term global Disney streaming subscribers in the 250M range.

BMO Capital analyst Daniel Salmon raised the firm's price target on Disney to $165 from $150. The analyst notes that the company "delivered on the promise" of planning for Parks re-opening to be incremental margin positive, while its Disney+ streaming subscriber trends also remain strong with 73.7M vs. his 62.5M target. Salmon is adjusting his DTC value assigned to Disney shares to $100, adding that the focus shift is taking place "faster than expected".

These last two calls are pretty stunning in terms of Disney's future. Potentially 250 million Disney+ subscribers could make the stock worth $200 right now.

Bottom line: It's hard to argue with the value these analysts see in this brand with its strong creative franchises and loyal customer base heading into a digital streaming future. While near-term estimates will be noisy and could keep DIS in the cellar of the Zacks Rank, the potential exists that analysts will be shifting back very soon to raising estimates as core segments see their troughs. The Zacks Rank will let you know.

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