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Disney is a cheap stock right now, this portfolio manager says

There are lots of beaten up stocks in today’s market many of which might look like bargains, and one that should be catching your eye is Walt Disney Company (Disney Stock Quote, Charts, News, Analysts, Financials NYSE:DIS). That’s the scoop from portfolio manager John Zechner who just named the Mouse House one of his top picks for the year ahead.

“The stock is down almost 50 per cent from its peak at $195 and is trading at about $100 right now,” said Zechner, chairman of J. Zechner Associates, who spoke on BNN Bloomberg on Friday.

Disney shares slid further on Friday to end the week on a down note, bringing the stock down to levels not seen since the early days of the pandemic when the whole market took a turn for the worse. At $100 per share, DIS is now at much the same place it was living between 2015 and early 2019, with the latter being when Disney first announced it was throwing its hat in the streaming content ring. That lifted the share price and buoyed hopes that the company would be challenging Netflix’s dominance in streaming, an increasingly crowded arena but for Disney only one of its many businesses which include TV, films, merchandise and its theme parks and cruise ships.

For Zechner, Disney’s numerous strengths make it a good buy, especially where it’s currently trading. 

“When I look at it the last two quarters, in particular, the parks have done phenomenally well. Even though you’ve got smaller capacity in the US parks, the margins are that much higher. I guess they’ve raised pricing and it’s still filling up. So, Parks is doing well,” he said. 

“And you know, nobody cross-sells their media assets better than Disney. When you look at the acquisitions they’ve done over time from the recent [21st Century Fox] one to Star Wars and the Lucasfilm franchise and what they’ve done with Marvel — they’ve got an exceptional library built up and no one cross sells their library into other asset better. Tthey come up with a great film, they make it into a TV series, you put it as a ride at the park, you make it a game, you make it merchandise and then on top of all of that now they got the streaming service, which may be losing money in the short term but with their library I think their streaming will do well,” Zechner said.

Disney saw its Parks, Experiences and Products revenue more than double year-over-year in its latest report quarter, its fiscal second 2022, delivered in early May. Overall revenue grew by 23 per cent from the pandemic-influenced results of early 2021, hitting $19.249 billion, which broke down into $13.620 billion from Disney Media and Entertainment Distribution (up nine per cent year-over-year) and Parks and Experiences at $6.652 billion compared to just $3.173 billion a year earlier. On earnings, Media and Entertainment brought in $1.944 billion in operating income and Parks, etc. brought in $1.755 billion.

A surprise bonus came in Disney+’s subscription numbers which climbed to 137.7 million compared to 103.6 million a year earlier. That result was better than analysts had expected and looked extra impressive against Netflix’s quarterly report from a month earlier which revealed a loss of 200,000 subscribers over its latest quarter.

“Our strong results in the second quarter, including fantastic performance at our domestic parks and continued growth of our streaming services—with 7.9 million Disney+ subscribers added in the quarter and total subscriptions across all our DTC offerings exceeding 205 million—once again proved that we are in a league of our own,” said Disney CEO Bob Chapek in a May 11 press release.

Disney also looks good from a valuation perspective, Zechner said, once you take into consideration all its earnings sources. 

“These guys are really positioned well,” Zechner said. “On an earnings basis right now it may not look as cheap as it’s been because of the money-losing proposition still on the streaming side but on a sum-of-the-parts basis this stock is cheap, with a lot of growth levers in place.”

“It’s been one of the great growth stocks over the past six decades and I don’t think that’s about to change,” he said.

Disney’s operating loss on its streaming services for its latest quarter were $887 million compared to a loss of $290 million a year earlier. But the company plans to keep spending to bring in more original content for streaming. 

“As we look ahead to Disney’s second century, I am confident we will continue to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger, more connected, and magical Disney universe for families and fans around the world,” Chapek wrote in the fiscal second quarter press release.

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