From its February 2023 high of $118.18 to its 2023 low of $79.75 in September, Walt Disney (DIS) stock is down 33%. It hasn’t consistently traded at this level since 2014.
Every time something good happens to Bob Iger and the rest of its management team -- the company signed a multi-year with cable company Charter Communications (CHTR) that eliminates what could have been a costly battle over distribution rights for Disney+ -- something bad seems to rear its ugly head.
According to a Bloomberg report, the company could fall short of its 2024 subscriber targets for Disney+. In August 2022, the company projected to have between 215 million and 245 million Disney+ subscribers by 2024.
With 15 months until December 2024, the company’s subscriber base for Disney+ sits at 105.7 million. Throw in 40.4 million from Disney+ Hotstar, its streaming service in India, and it’s still 70 million away from its 2022 projections.
CEO Bob Iger’s big job over the next year is to push the profitability button at Disney. Anything that can’t deliver profits, or in the case of Disney+, massive “potential” profits, will be thrown overboard.
Trading at levels unseen in nearly a decade, value investors must be pulling their hair out trying to figure out if this is the most significant buying opportunity in the history of investing -- or a value trap of monumental proportions.
If you’re like me and somewhat on the fence about Disney, options are an excellent way to gain exposure without breaking the bank.
Here’s why.
The Other Piece of Good News That Matters
Disney announced on Tuesday that it was spending $60 billion on its theme parks and cruise line over the next 10 years. I’ve long thought that this business segment was essential to its long-term success as a company and stock.
Sure, the pandemic showed off the downside of an in-person entertainment business, but as we’ve seen the past year, even pandemics have past-due dates. People are visiting its parks and traveling on its cruise ships in tremendous numbers.
In the nine months ended July 1, 2023, the Disney Parks, Experiences and Products (DPEP) segment generated revenues of $24.84 billion (17% higher than last year) with an operating profit of $7.64 billion (20% higher).
While DPEP accounted for just 37% of its revenue through the third quarter, it generated 77% of Disney’s operating profit.
Kudos to Iger for having the good sense to invest in what’s working and has been a proven winner for decades. Without all the Disney characters walking around its theme parks, you don’t have a Disney brand to speak of.
The company suggested having enough land (~1,000 acres) to build seven more Disneylands at all its sites. Disney has six cruise ships, including the Disney Treasure, whose first sailings begin in December 2024. It plans to add three more cruise ships in fiscal 2025 and 2026.
You don’t mess with a winning hand. DPEP is a winning hand.
Disney Stock Down on the News
As is always the case when a company announces big spending plans, investors sometimes don’t wring their hands with glee. That was the case with Disney stock on Tuesday. Its shares are down more than 3.5% in early afternoon trading.
However, as the company’s presentation accompanying the $60 billion spending plan showed, DPEP revenues are expected to hit $32.3 million in fiscal 2023 (October year-end), up from $23.5 billion in 2017, with operating income of $9.2 billion, or 28.5% of revenues, which is very healthy.
It pointed out a vital statistic in today’s presentation to analysts in Florida: for every guest that visits a Disney theme park, there are 10 Disney fans (movies, TV, etc.) who’ve never been. That’s a massive addressable market just waiting to be captured.
As the company adds more and better ships, the Disney Cruise Line’s profitability continues improving. As a result, since fiscal 2012, it’s grown its operating income by 23% annually over the past decade. Streaming might be up for a couple of tough years, but barring another pandemic, it’s smooth sailing for DPEP.
The Options to Buy
I'm looking out a year to the Sept. 20/2024 expiry, 367 days from today. The most popular call by open interest is the $115 strike with a $2.06 ask. That’s just 1.8% of the strike. The biggest drawback is that Disney stock has to appreciate by more than 40% over the next year for you to want to exercise your right to buy 100 shares.
However, based on a delta of 0.2361, DIS only has to appreciate by 11% over the next year, doubling your money on the call should you decide to exit the position early.
Over the same timeframe, selling the $115 put gives you $32.50 in income, an annualized yield of nearly 40%. It’s currently deep in the money, which means unless the stock takes off like a rocket, you will have to buy the shares at $115 less $32.50, for a net price paid of $82.50, 39 cents higher than its current share price.
The problem with this scenario is if the shares fall into the $70s or $60s in the next year, instead of moving back into triple digits, you’re looking at as much as a $2,200 paper loss ($60 share price) on the stock.
For this reason, while the 40% return on the put income is attractive, it comes with a big string attached. For this reason, the Sept. 20/2024 $115 call is the better way to go.
I see Disney stock higher than $82 in a year. However, the big question is how much. It all comes down to its progress in selling legacy TV assets and moving Disney+ closer to profitability.
I guess that’s why they pay Iger the big bucks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
