Disney (DIS) – Bullish Analysts, Proxy Battles & Legal Settlements – March 30, 2024

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Disney (DIS) – Bullish Analysts, Proxy Battles & Legal Settlements – March 30, 2024

UBS

This week, UBS came out with a glowing, thesis-confirming research note on Disney. It set a $140 price target, but as always, the reasoning for the note matters much more to me than the target. UBS sees park outperformance driving shareholder return growth and significant flexibility to reinvest in its highest return businesses (parks & experiences). In my view, that will pair quite nicely with its streaming business, which is rapidly approaching breakeven EBIT. We should be left with a growing cash flow monster (parks) and a budding cash flow monster (streaming), both of which will more than replace the  demand erosion within its linear business. This is all review. I’ve been talking about it since I started the position last year in the 80s. What isn’t review is the firm’s quantitative targets provided.

UBS sees Disney compounding earnings at a 25% clip from fiscal year 2023 through 2026 to reach $7.34 in EPS. That’s 20% ahead of consensus. It also sees it reaching $14 billion in free cash by the end of the planning period. That is 36% ahead of consensus and represents a 48% 3-year FCF CAGR. Disney trades for 23x FY 2024 FCF (Free Cash Flow). If it stays right there from today to then, that would represent a 19% return CAGR (2023 period not included in return CAGR is why return CAGR is not equal to FCF CAGR with same multiple). Disney’s 3 & 5 year FCF multiple averages are 43x and 50x, respectively. If we assume its multiple expands to 30x during that time as sentiment improves alongside the financial recovery, we get a 23% return CAGR. That’ll work just fine.

Proxy Battles

The proxy battle between Disney and mainly Trian (Nelson Peltz) will play out next week. As I’ve said before, I don’t really care how this goes. If Disney wins, it will continue on its current path with a larger, shareholder-focused microscope hanging over its actions. If Peltz wins, he will get his desired board shake-up and a voice in the room. Why doesn’t this concern me? Because I don’t think Disney has a great board. I think Disney has a great CEO. The board spearheaded the Chapek hiring and Disney’s shift to embracing cultural influence over great content, strong shareholder returns and ramping free cash flow. One of Peltz’s key demands is to control more of the succession plan. The current board has already shown you they struggle with transitions. So? Getting some fresh blood in there to alter the approach to replacing Iger this time is fine with me.

Peltz has also explicitly come out in support of Iger. Hearing that assuaged pretty much all of my concerns. His criticism of the board is well-placed, just like his support of Iger is. This newer item surprised me in a good way. What matters to me is that Bob continues steering this turnaround and sharpening company focus to drive Disney’s next decades of success. There will be significant bark and loud headlines coming from this event. I truly don’t think the coinciding bite will materialize.

Florida Legal Battles

A few years ago, Disney leadership criticized Florida’s passing of what was nicknamed the “Don’t Say Gay” bill. As always, I will fully ignore the social and political aspects of this and focus on Disney specifically. In state retribution for this public criticism, Walt Disney World lost special tax exemptions and Disney voluntarily placed a target on its back from what had been a powerful ally. More lawsuits were subsequently filed by Disney for unfair treatment.

This week, disputes were settled as Disney lawsuits against Florida were all dropped. I view this very positively. Walt Disney World is still a cash flow printer and compounder without the tax status. And now? Disney and Florida can work to repair a somewhat fragile relationship. It can now begin to morph this influential state government back into an ally. To me, this is a sign that Disney is serious about re-focusing the company on telling great stories… sharing great experiences… and then being quiet. That’s immensely encouraging for us shareholders.

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