Is Disney’s expansion into residential real estate good for the stock forecast? (NYSE: DIS)

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Summary in seconds

My Hold Rating for shares of The Walt Disney Company (NYSE: DIS) remains unchanged from my previous update for DIS published on December 15, 2021, where I highlighted the $33 billion content spend of the company for 2022. In the current article, I discuss whether Disney’s recently announced venture into residential real estate will affect its future financial performance.

Disney’s expansion into residential real estate is not expected to have a major impact on the company’s financial guidance at this time. Instead, the pace of recovery in its theme park business and its future spending in the Direct-to-Consumer or DTC business should affect Disney’s business outlook to a much greater extent. Disney is expected to grow its net income by a CAGR of +20.2% for fiscal 2023-2025, and DIS’s forecast P/E multiple for fiscal 2023 of 23.8x appears to be fair and reflective of the outlook. medium-term growth of the company. Since Disney shares do not appear to be mispriced, a Hold rating for DIS is appropriate.

What are Disney Storyliving Communities?

Last month, Disney released A press release revealing that Cotino, its first Storyliving by Disney community will be located in Greater Palm Springs and built in partnership with real estate developer DMB Development.

Artists Impression of what Cotino might look like

Artist

disney

On the company’s Storyliving by Disney website, DIS describes Cotino as “voluntary club membership” that “provides access to a waterfront clubhouse, club-only beach and recreational water activities” and “entertainment and Disney activities throughout the year for an additional fee”. Activities Disney plans to hold in Cotino and other future Storyliving communities could potentially include “wellness programs,” “live performances,” and “cooking classes,” to name a few. -uns, as the company’s press release points out.

To better understand Disney’s Storyliving communities, it may be helpful to step back in history and review the company’s past residential real estate projects.

Disney’s first “urban planning project,” “a city designed, styled, and revolving around Walt Disney” that boasted “fantastic Disney-style architecture” named Party was built in 1996, according to the book Disney culture written by John Wills. In 2011, DIS launched another residential real estate project in collaboration with hotel operator Four Seasons, known as golden oak. Author Andrew Ross mentioned golden oak as “an ultra-luxurious enclave of three hundred residences” that looks “more like a country club” with “concierge services on offer” in his book Sunbelt Blues.

In other words, this isn’t the first time Disney has explored residential real estate projects as another way to monetize its intellectual property. It’s no different from how Disney makes money from its iconic Mickey Mouse character with theme parks, merchandise, and shows.

How will Disney’s latest foray into residential real estate impact its business prospects?

Disney’s foray into residential real estate again with Storyliving by Disney and Cotino is unlikely to have a significant impact on the company’s business prospects in the near term.

Although DIS did not disclose any quantitative details about Cotino, the company emphasized on its Storyliving by Disney website that it “is not the developer” and “the builder or seller of homes” and noted that the developers like DMB Development “are independent and operated.” It’s reasonable to infer that Disney might have an agreement with DMB Development to license its intellectual property. But these license fees are unlikely to be very large, and there is only one project in the works so far, Cotino.

A key source of revenue for DIS could be recurring club membership fees for Cotino or one-time payments associated with “Disney entertainment and activities” held in Cotino that I highlighted in the previous section. In any case, a single Cotino community is unlikely to generate substantial revenue comparable to what Disney derives from its core theme park business.

It’s also telling that Disney didn’t mention Storyliving by Disney or Cotino at all when the company attended the recent Morgan Stanley (MS) Technology, Media and Telecom or TMT conference held on March 7. 2022. Similarly, no questions were asked. about this Disney line of business at the conference.

If Cotino proves to be a big hit and Disney plans more Storyliving by Disney Communities and develops other associated revenue streams, things could be different in the future. But as things stand, Disney’s residential real estate business isn’t expected to contribute significantly to the company’s revenue or profits anytime soon.

In the next two sections of the article, I focus on Disney’s most recent quarterly historical metrics and its forward-looking financial guidance.

Key measures of BID actions

Disney stock price rose +3% from $147.23 as of Feb. 9, 2022 to $152.16 as of Feb. 10, 2022 after the company released its fiscal 2022 first quarter financial results (September 30 YE). Shares of the company then rose a further +3% to a one-month high of $156.35 on February 16, 2022. Although DIS’s share price eventually corrected to close at 133.64 $ as of March 10, 2022, consistent with general market weakness, investors were clearly pleased with the company’s recent quarterly results.

DIS revenue grew +34% YoY to $21.8 billion in Q1 FY2022, +4% above market consensus forecast. Disney’s non-GAAP adjusted earnings per share also increased from $0.32 in the first quarter of Fiscal 2021 to $1.06 in the first quarter of Fiscal 2022, which exceeded +67% the consensus estimate from Wall Street. During the company’s first-quarter fiscal 2022 earnings call, Disney noted that “our national parks and resorts delivered first-quarter revenue and operating income that exceeded pre-pandemic” and that was the main driver of Disney’s better-than-expected revenue and earnings in the last quarter.

In addition to delivering excellent revenue and net income growth, Disney also performed well on a key operational metric, subscriber growth for Disney+. The company added +11.8 million new Disney+ subscribers in the first quarter of fiscal 2022, which is a significant improvement from the +2.1 million net subscriber additions it achieved in the first quarter of fiscal 2022. fourth quarter of fiscal 2021. In contrast, main streaming rival Netflix (NFLX) generated relatively lower net subscriber numbers. additions of +8.3 million in the same quarter. Disney attributed the decent Disney+ subscriber growth in the first quarter of fiscal 2022 to a combination of factors, which included “new content, our strategic decision to include the Disney Bundle with all Hulu Live subscriptions, and new launches in the market” during its recent quarterly earnings briefing.

What is DIS Stock’s forecast?

Revisions to Disney’s earnings per share or EPS forecasts over the past three months offer important insights.

Revisions to DIS EPS forecasts over the last three months

DIS Revisions

Looking for Alpha

On the one hand, sell-side analysts raised Disney’s FY2022 EPS estimate by +8.7% per the chart above. This is fitting, as DIS’s fiscal 2022 first quarter results beat expectations, and the company’s post-pandemic theme park recovery appears to be on track.

On the other hand, Disney’s EPS guidance for fiscal years 2024, 2025 and 2026 saw significant cuts. I think this reflects market concerns that Disney’s larger-than-expected investment in its DTC business will hurt the company’s overall profitability in the medium term.

More importantly, Disney’s current valuations look fair relative to its future earnings growth. DIS’s FY2023 consensus normalized P/E of 23.8x appears to be more or less in line with its consensus EPS CAGR of +20.2% for the FY2023-2025 timeframe according to S&P Capital IQ The data.

Is the DIS action a buy, sell or hold?

DIS stock is still classified as held, as I stand by my view that “Disney valuations are not attractive enough” according to my previous article from December 15, 2021. The company’s recent residential real estate project merits consideration. ‘we focus on it, because it represents a new source of revenue for the company. But it’s too early to judge the impact of this new business opportunity, as Disney currently only has one project (Cotino) underway and the company has yet to release meaningful details on the business economics. and the Storyliving by Disney revenue model.

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