Source: PaxForex Premium Analytics Portal, Fundamental Insight
Walt Disney stock prices are up 30 percent since hitting a 52-week low at the beginning July. The House of Mouse did its part to back up this rise by announcing strong operating results for its fiscal third quarter, which ended July 2.
While Disney's results seemed to be strong across the board, the key was the parks, entertainment, and merchandise segment, which nearly doubled its revenue YoY to $21 billion in the first nine months of fiscal 2022 (the fiscal year ends Oct. 1).
Investors should look out for two catalysts regarding the parks business that could open up new opportunities for buyers of Disney stock over the next five years.
Since the stock is still trading in the same range it has been in for the past five years, it is clear that the stock price is not keeping up with the growth of Disney's business. This becomes clear when you look at the park's revenue and operating profit levels. In the same quarter of 2019, Disney's revenue in this segment was $6.6 billion, up 7 percent from the previous year. Disney surpassed that figure in the most recent quarter, posting segment revenue of $7.4 billion, a 70% increase over the previous quarter.
Most importantly, segment operating income was nearly $2.2 billion, or an operating margin of 29.6%. That's up several points from 2019.
Keep an eye on international travel. International travel fell during the pandemic but is expected to rebound to 55-70% of 2019 levels in 2022, according to Statista. The travel market was growing strongly before the pandemic and has yet to fully recover, either industry-wide or at Disney theme parks.
During Disney's fiscal third-quarter earnings report, CFO Christine McCarthy said that when international travel fully returns to normal levels, it should "increase margins," since international travelers tend to stay longer and spend more money.
Another trend to keep an eye on is the rise in per capita spending in the parks, which is up 40 percent from the same quarter three years ago. This explains why Disney is generating more revenue in the parks, even though traffic is still lower than in 2019.
Company executives noted several factors contributing to the increase in spending per guest. First, the new reservation system is allowing to excellently handle traffic in the parks while optimizing economics on the business side. One element of this strategy was the launch of the Genie+ service, which allows guests to better plan their day in the parks and skip the long lines at some attractions in exchange for a service fee. The Genie+ fee is probably very profitable for Disney.
Management also credits new rides. At Disneyland Paris, for example, guests are spending 30% more than they did in 2019 after the Avengers Campus opened on July 20.
Disney even recently launched a new cruise ship powered by liquefied natural gas, an environmentally friendly fuel that is cheaper than oil. This demonstrates just how far company executives are going to go to save money and improve profitability.
Disney is completely changing the park experience to enhance the guest experience while positioning the business to increase shareholder returns. The stock market has yet to appreciate these improvements, but this entertainment holding company won't go down forever.
A recovery in international tourism could be the key push that unlocks Disney's potential and leads to stock gains over the next decade. That is why Disney may be the best travel and tourism asset to buy right now.
As long as the price is above the 112.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 116.46
- Take Profit 1: 126.00
- Take Profit 2: 135.00
Alternative scenario:
If the level of 112.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 112.00
- Take Profit 1: 100.00
- Take Profit 2: 91.00
