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Four days after Disney CEO Bob Chapek unveiled his three “strategic pillars” for the company, Guggenheim analyst Michael Morris the company’s stock from “buy” to “neutral” and cut his price target from $205 to $165.
The Wall Street expert wrote in a Friday report that this reflected his “updated view of the pace of profit growth at the company’s direct-to-consumer and parks businesses, which is now below consensus through fiscal (year) 2024.”
Morris cited such factors as increased streaming investment and a slower theme parks recovery as affecting his earnings forecasts. “Our updated Disney model incorporates key data from the company’s 10-K filing,” or annual report, he explained, and “reflects a higher than previously forecast increase in content expense, particularly at the direct-to-consumer segment, and our view of recent parks activity, impacted by heightened attendance restrictions and consumer caution.”
In its recent annual report, Disney disclosed that it plans to spend approximately $33 billion on content over the next year, including streaming and linear programming, as well as sports content. That is an $8 billion increase from fiscal year 2021, when the company spent approximately $25 billion on content.
The net effect of Morris’ changes based on the report was that he lowered his total segment operating income before depreciation and amortization estimate to $14.5 billion for the current full fiscal year, down from $16.2 billion previously.
“In our sum-of-the-parts approach, we value the company’s direct-to-consumer business at about $82 per share based on five times forecasted 2024 segment revenue, 10 percent below the current Netflix valuation with our discount attributed to our view of a modestly narrower addressable market given Disney’s programming genres,” Morris detailed.
The analyst also values the company’s linear TV networks, content sales and licensing businesses at around $31 a share, with the theme parks and consumer products business being valued at $81 per share. “Corporate expenses and the impact of inter-segment eliminations are applied to these parts to yield a $172 valuation,” he explained.
Morris also performed a discounted cash flow analysis, which yields a $158 valuation, with the average of the two approaches yielding his new $165 price target.
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