Want to beat the market? Bet on companies with deep economic moats -- or the ability to maintain competitive advantages over the long term. Walt Disney (DIS -1.01%) fits the bill. And its industry-leading intellectual property -- along with footprint in many synergistic industries -- will help it thrive in the post-pandemic economy.
Bouncing back from the pandemic
Walt Disney is several businesses rolled into one. And some of these segments are performing better than others. In the fiscal third quarter, total revenue surged 45% year over year to $17 billion, and net income jumped from negative $4.7 billion to a gain of $923 million in the same period.
The company is enjoying easy comps against the lockdown-heavy 2020 -- especially in its parks, experiences, and products division, which more than quadrupled to $4.3 billion against the prior-year period.
Image source: Getty Images.
Disney has reopened flagship properties and added new attractions such as a brand-new Avengers Campus at Disney California Adventure and a Marvel-themed hotel in Paris. But although the segment has returned to profitability (mainly through a surge in merchandise sales), revenue is still down around 34% versus the same quarter in 2019, so there is plenty of room for continued recovery.
Disney is hiking prices to capitalize on pent-up demand and make up for the lower park capacity at its properties with plans to increase prices at its Shanghai property by up to 10% next year. Disney's amusement parks are still far from prepandemic levels, but things are moving in the right direction.
Building new growth drivers
Disney's media and entertainment distribution segment grew 18% YoY to $12.7 billion in the third quarter -- although operating income declined 32% to $2 billion because of higher production costs and a sales mix slanted toward streaming, which isn't profitable yet. Streaming revenue surged 57% to $4.3 billion, and the businesses' operating loss narrowed from $624 million to $293 million as it gained scale.
Disney's streaming business has a built-in competitive advantage because of its valuable intellectual property like Marvel and Star Wars, which it uses to create original content on the Disney+ platform. As with the amusement parks, the company can also flex its pricing power to boost growth and margins.
In March, Disney increased its Disney+ monthly subscription price from $6.99 to $7.99, and there is still room for more increases considering the price is still lower than that of Netflix, which costs $8.99 per month for the basic plan. Disney+ now boasts 116 million subscribers, up 102% from the prior-year period, and management expects the subscriber count to surge to as much as 260 million by 2024.
Justifying the valuation
With a forward price-to-earnings (P/E) multiple of 35, Disney's stock valuation is slightly higher than the S&P 500's average of 31. But shares look like an excellent deal compared with streaming rival Netflix, which trades for 52 times earnings.
Disney has faced more coronavirus-related challenges than its pure-play rival. But now that the situation is normalizing, Disney's profitable amusement park and merchandise business and its fast-growing streaming platform could lead the market to reevaluate what the company is worth. Now is a great time to get in while the stock is relatively affordable.
