Going Into Earnings, Is Disney Stock a Buy, a Sell, or Fairly Valued?

Disney is set to release its fiscal third-quarter earnings report on Aug. 7. Here’s Morningstar’s take on what to look for in Disney’s earnings and stock.

Key Morningstar Metrics for Disney

• Fair Value Estimate: $115.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Earnings Release Date

• Wednesday, Aug. 7, before the start of trading

What to Watch for in Disney’s Q3 Earnings

• There’s room for upside surprise in streaming after management implied that profitability last quarter may not persist into this one, and we’re not expecting a big quarter of subscriber additions. Commentary is almost more important, as streaming may begin to look like a much better business soon. The firm just rolled out a bundled option with Max, and its sports joint venture platform with Warner Bros. Discovery WBD and Fox is set to launch this fall. Should we expect anything different in results after the Max bundle, or with the joint venture after Warner seems to have lost its NBA rights?
• We’re always looking at the linear results, as we think that’s been the biggest overhang on the stock. However, we don’t anticipate fiscal Q3 numbers to look materially different than the recent trend. Advertising should pick up next quarter with election TV ads.
• We’ll see how good Inside Out 2′s success at the box office is for results, particularly keeping in mind the huge opening week for Deadpool & Wolverine. We’ve been lukewarm on the studio side of the business, but it may be a much more meaningful contributor now.
• How much has the experiences business slowed? We’ve been expecting a major slowdown, but Comcast’s CMCSA parks results imply it could be worse than feared.

Fair Value Estimate for Disney

With its 3-star rating, we believe Disney’s stock is fairly valued compared with our long-term fair value estimate of $115 per share.

We project linear networks revenue (which no longer includes ESPN after the firm changed its reporting segments) to average 1%-2% annual growth over our five-year forecast. We expect growth to be somewhat choppy from year to year, mostly due to advertising revenue. We project a slight annual decline in the affiliate fees Disney receives from pay-TV distributors, due to a continuing decline in the number of subscribers to pay-TV services. However, we expect the pace of cord-cutting to slow, and the decline should be largely offset by growth in fees over time.

Read more about Disney’s fair value estimate.

Economic Moat Rating

We are maintaining our wide moat rating for Disney. Ultimately, we believe the firm’s ownership of timeless characters and franchises and its ability to continue creating and attracting top-tier content outweigh its near-term challenges related to the evolving media industry. Although we think it’s likely that the lack of the traditional cable television bundle as a foundation will keep Disney from returning to the level of profitability it routinely achieved in years past, we still expect the firm’s returns on invested capital to comfortably exceed its cost of capital over the next 20 years.

Recent struggles at Disney are related to the shift from the linear television model—wherein nearly all U.S. households subscribed to a pay-TV service offered by distributors like cable and satellite providers—to the direct-to-consumer, or DTC, streaming model. The attraction of Disney’s top-tier networks, led by ESPN, ABC, and the Disney Channel, resulted in this package of channels being included in nearly all subscriptions at industry-leading rates. Relatively high levels of television viewership also boosted advertising revenue. Cord-cutting and a decline in linear viewership have dampened both revenue streams.

Read more about Disney’s moat rating.

Financial Strength

Disney is in sound financial health. While its debt load and financial leverage are still higher than they’ve historically been, they’ve declined each year since 2020. The firm ended fiscal 2023 with $32 billion in net debt and a 2.2 net debt/EBITDA ratio, both marking their lowest levels since 2018. Leverage may take a step back in 2024 as the firm buys the remaining one-third stake in Hulu, which should be in the $10 billion range. From there, we expect Disney’s financial standing to improve further as its DTC streaming business moves to profitability by fiscal 2025.

Disney’s cash flow outlook is now much improved after it was crunched by the pandemic and investments in its streaming service. The firm generated $5 billion in free cash flow in fiscal 2023, the most since 2018, and cash generation should continue rising. The company had enough cash on the balance sheet at the end of 2023—over $14 billion—to fund the Hulu purchase, but we expect the firm to take on some incremental debt unless it sells other assets.

Read more about financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Disney is High. The current evolution of the media industry is the main factor behind our assessment. Outside its parks and experiences business, Disney historically had three main sources of revenue: fees it received from pay-TV distributors to carry the Disney bundle of channels, television advertising, and licensing fees for movies and television programming distributed by third parties. All these sources are now under pressure. Cord-cutting and diminished linear television viewership have depressed carriage fees and advertising revenue. Shorter runs in movie theaters and an industry shift toward DTC streaming services have depressed licensing revenue.

Read more about Disney’s risk and uncertainty.

DIS Bulls Say

• No peer can match the depth of Disney’s iconic characters, franchises, or content library, which will keep the firm’s streaming services in high demand and give it a leg up in creating new movies and television shows.
• The decline in linear television will slow, so the value of the assets associated with it will start to shine. ESPN remains the premier brand in sports; putting it on a streaming service will open it up to a new set of consumers.
• The allure of Disney’s parks business is unmatched, and it will be a continuing profit engine.

DIS Bears Say

• Linear television will continue to decline. Even if successful, newer revenue sources like DTC streaming will never equal the profitability Disney once enjoyed.
• Disney now competes with tech companies for major sports rights, and they may have incentives to continue driving up prices. Sports remain material to Disney’s future, and being forced to pay up for critical content will depress profits.
• Too many streaming platforms now exist, and it’s questionable whether consumers will be willing to pay high prices or stick with individual services month in and month out.

This article was compiled by Renee Kaplan.