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Stocks  | May 22, 2020

In early April, I laid out five big reasons why beaten-up Disney (NYSE:DIS) stock was positioned to rebound big in the coming months. Those five reasons largely centered around the fact the world was going to get back to normal much sooner than most expected.

Fast forward almost two months. Disney stock has risen more than 20% since early April. The catalyst? In short, the world is getting back to normal much sooner than most expected.

Pandemic hysteria is calming down. Stores are re-opening. Restaurants are re-opening. Movie theaters and gyms are re-opening. Consumer behavior is gradually normalizing.

That’s all great news for Disney, and it’s largely why DIS stock has soared 20% in less than two months.

This big rally in DIS stock won’t end soon. Instead, there are five big reasons why Disney stock will keep rallying into the end of the year:

  1. Disney’s theme parks, restaurants, and retail shops will gradually re-open over the next few months, and Disney’s depressed Parks & Experiences business will meaningfully rebound.
  2. Movie theaters across the world will also gradually re-open over the next few months, providing a boost for Disney’s depressed Studio Entertainment business.
  3. Professional sports leagues will resume in the summer, and ESPN/ABC viewership and ad revenues will rebound in a big way.
  4. Disney’s red-hot Direct-to-Consumer (DTC) business will sustain robust momentum thanks to international expansion.
  5. Disney stock remains attractively undervalued relative to the company’s long-term profit growth potential.

Theme Parks Will Re-Open

Over the next few months, Disney’s restaurants, retail shops, and theme parks will gradually re-open, and the company’s physical Parks & Experiences business will see a huge rebound in revenues and profits.

Disneyland Shanghai is already open. And while the park is operating at limited capacity, tickets have been selling out, implying that consumer demand has not been significant impacted by Covid-19. In the coming weeks to months, Disney will increase Disneyland Shanghai capacity, and the park should be operating at near-100% revenues and profits by the end of the year.

Simultaneously, Disneyland has begun a phased reopening of Disney Springs, the retail, dining, and entertainment hub located adjacent to Disney World. Many analysts believe that this reopening is the first step towards the eventual reopening of Disney World. Indeed, Disney World is now accepting reservations for July.

There hasn’t been much news on a Disneyland reopening, mostly because California has featured more stringent reopening measures than Florida. But California is relaxing some of those reopening measures now, and it increasingly appears that Disneyland could be poised for a reopening in the coming months, too.

Big picture: Disney has already started a phased reopening of its parks, retail shops, and restaurants. This reopening will continue with favorable progress over the next few months. As it does, Disney’s growth trends in physical Parks & Experiences business will meaningfully rebound.

Movie Theaters Will Re-Open, Too

Movie theaters across the country are getting the green-light to reopen. For example, in states such as Arizona and Georgia, movie theaters have the OK to reopen if they want to.

While most big movie chains are waiting to reopen because the risk-reward doesn’t make sense to reopen yet (May isn’t a big movie month), these movie theaters will reopen by the summer, just in-time for some big content releases.

That’s good news for Disney. The media giant isn’t set to release any major hits until the back-half of 2020 anyway, such as a star-studded Jungle Cruise movie, a brand-new Marvel franchise movie dubbed The Eternals, and a Steven Spielberg Broadway musical West Side Story.

In other words, movie theaters in various states will reopen over the next few months, just in time for Disney’s big 2020 movies to hit the big screens. This will spark a rebound in Disney’s Studio Entertainment business throughout the rest of the year.

Pro Sports Leagues Are Coming Back

It increasingly appears that, amid more lax reopening policies, pro sports leagues will resume by the summer of 2020.

Multiple reports corroborate that MLB owners have agreed on a July start date for the 2020 season. Meanwhile, NBA facilities are reopening for workouts, and the most recent chatter is that the NBA season could resume within the next few months, with games being played at either Las Vegas, Disney World, or both.

That’s big news for Disney. The company owns ABC and ESPN. Those two channels attract huge viewership through televising MLB and NBA games. With those two leagues postponed, viewership has dropped significantly. When those two leagues come back, viewership will come back, too.

As goes viewership, so goes ad revenues. Consequently, it appears that Disney’s Media Networks business is poised for a big ad revenue rebound in the summer as the NBA and MLB come back.

DTC Momentum Will Persist

Disney’s DTC business, headlined by Disney+, is on fire, and this robust momentum will persist.

In Disney’s otherwise awful second quarter, Disney’s DTC revenues rose 260% year-over-year, paced by huge subscriber growth across Disney+, ESPN+, and Hulu.

Of course, some of this strength is due to the novel coronavirus, as stay-at-home orders created an increase in demand for at-home entertainment options like Disney+, ESPN+, and Hulu. But a lot of this also has to do with the fact that Disney has finally figured out how to package its in-demand content in a cost-conscious, streamlined, on-demand way to consumers, and is now expanding this service across the globe.

While the Covid-19 tailwind may ease in coming months, this other tailwind won’t. Consequently, sparked mostly by international expansion, Disney’s DTC business should sustain robust momentum going forward.

DIS Stock Is Undervalued

My modeling suggests that DIS stock remains undervalued at current levels.

Revenues, margins, and profits are going to take a major hit this year. There’s no question about it. But in 2021, all of Disney’s beaten-up businesses (Parks, Studio, and Media Networks) will rebound, thanks to economic normalization tailwinds. Thereafter, those businesses will return to their normal, steady growth trajectories, while the DTC business continues to ramp thanks to streaming tailwinds and international expansion.

Assuming so, my modeling implies that Disney can hit around $10 in earnings per share by 2025.

Historically, this stock normally trades at 19 times forward earnings. Based on that average multiple and a 10% annual discount rate, $10 in 2025 earnings per share implies a fair 2020 price target for DIS stock of roughly $130.

Shares trade hands around $115 today. Thus, this rally in DIS stock has more runway left.

The Bottom Line on DIS Stock

Disney is a long-term winning company with multiple strong businesses that, while depressed today, will rebound as Covid-19 headwinds pass and global consumer behavior returns to normal.

DIS stock has rallied big on optimism that things are already gradually returning to normal. But this rally is far from done. Over the next few months, economic normalization will accelerate, and DIS stock will keep powering higher.

So, don’t fade this rally in Disney stock. Stick with it.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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