Tag: Alpha

That said, there is only so much growth that a company as large as Disney, with markets as saturated as its markets are, can achieve in the medium- to long-term future. For example, Disney’s parks are highly popular, but they operate in mature markets like North America, Europe, and Japan. These regions have demographic constraints and natural economic limitations on Disney’s growth. As a specific example, Tokyo Disneyland has reached a point where further expansion is constrained by the local market’s size; management expects its attendance to be down by 11% from its high in 2019 despite the opening of a $2.1 billion expansion in 2024.

Then, there is the growing and very robust competition from streaming services like Amazon Prime (22% market share) and Netflix (NASDAQ:NFLX) (21% market share), which are undeniably dominant against Disney+ (12% market share). I consider the greatest risk to Disney’s long-term growth prospects to be customer fatigue. There is some risk that the company will be viewed as a heritage company in time, rather than a modern entertainment leader, as it has historically been unequivocally considered. It is largely the company’s moderate growth prospects amid market saturation and competition, combined with no undervaluation, which leave me neutral on the stock.

Disney’s historical five-year revenue growth rate is 5.8%, compared to a consensus future three-year revenue growth rate estimate of 4.7%. However, the company’s historical five-year earnings per share without non-recurring items growth rate is 4.5%, compared to 11.6% as a future three-year consensus growth rate estimate. Given this, it is completely valid for the company’s valuation multiples to improve somewhat moving forward compared to recent history. The company’s price-to-sales ratio of 2.2 is currently just above its three-year median of 2.1. In my opinion, this may be slightly too low, given the higher earnings growth outlook moving forward.

With $112.5 billion in revenue in January 2030, the company will likely have $16.9 billion in net income if its net margin expands to 15% due to continued profitability in its direct-to-consumer segment, success in shifting to higher-margin legacy content, and further higher return on invested capital at its theme parks, among other factors.

The company’s basic share count has been increasing in recent years, but as the company’s general profitability improves post-pandemic and with income reported from streaming, the company will likely rely less on share issuance. To be conservative, I am forecasting an equal share count to present, 1.81 billion, for January 2030. Therefore, I estimate a revenue per share of $62.15 and a basic earnings per share of $9.34 for Disney in January 2030.

I will use the price-to-sales ratio for my terminal multiple, because the company has instability in its earnings, distorting the long-term trends in its price-to-earnings ratio. A price-to-sales ratio terminal multiple allows for more accuracy in my estimate. As I explained above, with better profitability moving forward, the company’s price-to-sales ratio will reasonably expand. I use a terminal multiple of the approximate midpoint of the final value of the 15-year price-to-sales ratio trendline in my chart above, and its current price-to-sales ratio. The terminal multiple is, therefore, 2.5. Therefore, I forecast that the company will have a January 2030 stock price of nearly $155. The current stock price is $110, so the compound annual growth rate indicated over five years is 7%.

Disney’s cost of equity is 13%, based on the risk-free rate of return of 4.65% (10-Year Treasury Constant Maturity Rate) plus Disney’s beta of 1.4 multiplied by the market premium of 6%. When discounting my January 2030 price target of $155 back to the present day using the company’s cost of equity as my discount rate, the intrinsic stock value today is $84. The current price is $110, so the margin of safety for investment is negative, at -23.5%, based on my model.

My valuation model posits that Disney stock will deliver just a 7% compound annual growth rate in its price over the next five years, with a negative margin of safety of -23.5% at this time. Therefore, there are certainly better investments on the market. Despite this outlook that is heavily impacted by valuation factors, Disney is continuing to operate reasonably well, with profitability in streaming and a highly accretive Parks and Experiences segment. However, its focus on legacy content to drive higher margins could also leave the company devoid of attractive and novel intellectual property over the long term. This double-edged sword makes me think Disney is vulnerable to decline over the next few decades.

This article first appeared on GuruFocus.