I own Walt Disney (NYSE:DIS) shares in my portfolio. The company reported impressive earnings results last night and shares are up around 8% as a result. Sometimes, a strong earnings report can indicate that a stock is a good investment. But sometimes, an increasing share price can be an overreaction. So is it time for me to buy more Disney stock? Or is the jump in the share price an overreaction?
Fundamentals
By my calculations, the increase in the Disney share price takes the company’s enterprise value to around $323bn. In order to invest in more Disney stock, I need to be confident that the company will make enough money to provide me with a satisfactory return on my investment at this price. And as Warren Buffett says, it can’t be close—the answer needs to scream at me, otherwise the stock isn’t a buy for me.
The company divides its operations into two segments. The first is its Parks, Experiences, and Products segment, which includes Disney’s theme parks, cruise lines, and resorts. The second is its Disney Media and Entertainment Distribution segment, which covers things like Disney+, ESPN, and the licensing of the company’s titles. To invest in Disney stock, I’ll need to know how much cash each of these is going to produce.
Parks
The company reported $7.23bn revenue in its Parks segment during the holiday season, compared to $3.5bn in the same quarter a year ago. Operating income also increased from a loss of $119m to a profit of $2.45bn. There’s no doubt in my mind that this is impressive, especially in a quarter featuring theme parks operating at a reduced capacity due to Omicron.
In order to take a view on whether or not this performance justifies buying Disney stock, I need to assess two things. The first is how quickly Disney’s theme parks will return to full capacity. The second is how much income they will generate when they do. To work out whether or not Disney stock is a buy, I need to know the answers to these questions.
Streaming
Disney added just under 12m new subscribers to its Disney+ service during October, November, and December. This represents an 8.5% increase in subscribers. I think that this is clearly impressive in a quarter where the number of Netflix subscribers increased by around 4%. The company also reported an increase in average revenue per subscriber from $4.12 to $4.41.
Currently, Disney+ is a loss-making service. Clearly, this is expected to change and the business will start producing income. As with the theme parks, there are two crucial questions for me as an investor. The first is when Disney will optimise its streaming service for profit. The second is how much cash this will produce when it does. Only once I’ve figured this out can I make an investment judgement about Disney stock.
Conclusion
I think that Disney is one of the best businesses in the world and I’m delighted to own the stock in my portfolio. During the pandemic, when the price was much lower, Disney stock screamed out at me as a buy. At current prices, though, it doesn’t. So I’m going to hold onto the shares I have for now and concentrate on my other investment opportunities.
Stephen Wright owns shares in Walt Disney. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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