Video-on-demand, the dominance of Netflix (NFLX) and consumers’ unwillingness to pay for bloated bundles of TV channels they don’t watch have crippled cable companies.
But few media giants have suffered as badly as Disney (DIS), which has placed huge bets on television programming, particularly sports, that consumers are saying they can do without, if they’re unable to find the same programming cheaper elsewhere. As a result, analysts have consistently slashed Disney’s revenue and earnings forecasts, waiting on the company to reset its business to this new reality.
It’s for this reason Disney stock, which has fallen 4% year to date, versus the 13% rise in the S&P 500 index, has underperformed the market over the past year and three years. But it’s time to play the long game with Disney. Not only has the stock shown to have bottomed since falling to $96.20 per share, the stock — currently trading at around $100 — is poised to regain its magic, reaching $115 to $120 in the next 12 to 18 months.
Not only is the Burbank, Calif.-based media conglomerate gearing up to unveil its own streaming service, the company is also in the process of scaling down from its heavy investment cycle — something that should become more evident in the company’s free cash flow (FCF) statement in the quarters ahead. Unlike in recent years, Disney’s FCF growth, which is up some $180 million year to date, is no longer being hindered by massive bets on areas of the business such as film and television production spending.
This is one of several aspects of Disney’s fundamentals that is being overlooked. The one that recently caught my attention is the fact that the stock, which has been on the decline much faster than Wall Street estimates, is cheap when compared to the company’s historical earnings multiple.
The stock is currently priced at a forward P/E ratio of 17. Not only is that almost two points below the average stock in the S&P 500 index, it’s almost half of the P/E Disney normally trades for. The forward P/E falls two points to 15 based on fiscal 2018 estimates of $6.47 per share. And despite Disney’s perceived lack of earnings growth, those projections assumes year-over-year EPS increase of 11%.
Looking ahead, the company is projected to earn $1.19 per share on revenue of $13.43 billion in the quarter that ended September. This compares to the year-ago quarter when earning were $1.10 per share on $13.14 billion in revenue. While these aren’t breathtaking expectations, that also plays favorably into Disney’s ability to beat its numbers.
From my vantage point, now is the time to bet on Disney’s recovery, especially when the shares are trading some 18% below their all-time high of $122.08. And given the low multiple, Disney can be owned with minimal risk, especially as the company’s cash flow is now back on the rise, which should help it to buy back shares, increase the dividend and pay down debt. In that regard, the fact that the company has — over the past nine months — repurchased nearly $6 billion shares and paid $1.2 billion in dividends should signal to investors that Disney believes in itself.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.