Disney’s stock price matches the value levels of buying opportunities

With the new economic cycle arriving in the U.S. stock market, specific stocks will likely grab most of the attention of investors looking for a value deal to multiply their wealth in the coming years. Hopefully, after the recent rallies in the stock indexes, which are reaching new all-time highs, you have made some profits and have enough liquidity to look for the next opportunity.

For reasons that will soon become clear, stocks like it Walt Disney NYSE: DIS offer yourself a risk skewed – in your favor – to reward the ladder today. After a disappointing performance from 2021 to 2023, the stock became a takeover target when it was just 38% of its all-time high price of $203 per share. The stock follows the rest of the market to bring you a new yearly high.

Some Wall Street analysts see negative signs for Disney shares. They are putting out their bullish views to reflect how much upside there could be for this company soon; this is especially true when you delve into what caused the stock to collapse, as well as what is recently causing its recovery.

The worst in the rearview mirror for Disney

Now there, in the rearview mirror, is everything negative there is to say about the company. Since cutting its dividend – to zero – during the peak months of the COVID-19 pandemic, Disney has spooked some investors. But above all, management decided to burn mountains of money on initiatives that were not necessarily successful.

Now the vision is different. Disney management wants to cut costs by up to $2 billion to return the company to its former profitability and former glory. Remarkably, before the pandemic the company generated net income margins of up to 20%, which is many times higher than today.

Looking at the period from 2015 to 2020, you will notice that Disney generated between 15% and 20% in net income margins, accompanied by double-digit rates of return on invested capital (ROIC). Since ROIC is what determines long-term stock prices, Disney was a safe bet when it comes to growing your wealth.

The picture changes completely if you expand this time frame to the post-COVID era, to 2021, to the present, which shows a significantly less profitable business with net income margins under 5% and low single-digit ROIC rates. This completely different company is headed for disaster, or at least that’s what the bears want you to believe.

If the truth be told, Disney is just one of a handful of consumer discretionary stocks punished for reinvesting large sums of money, amounting to nearly $15 billion in 2019 and a steady investment outflow of $4 to $5 billion thereafter . All this investment effort went into one project: streaming.

Most investors didn’t realize how long it would take for this new Disney subsidiary to pay off, a reality that dragged margins down as the costs of starting this business became more important. However, all of this is a thing of the past, as management closed out the recent financial quarter with some positive observations for the future.

Disney A Brighter future

According to its quarterly earnings press release, Disney grew its earnings per share by nearly 50%, all while being on track to reduce costs by as much as $7.5 billion this year. On a free cash flow basis (operating cash flow minus capital expenditures), the projected $8 billion served to fuel stock buybacks and dividend restoration.

Now that the Federal Reserve (the Fed) is ready to cut interest rates by the end of the year, securities exposed to the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY could see a recovery versus the broader S&P 500, an index the sector underperformed by as much as 4% last quarter.

Worldwide, another stock bought back as much as $35 billion of its shares Alibaba Group NYSE: CHILDsolely because management believes the stock is significantly cheaper than its true value.

Also believing that the stock was a ridiculous bargain today, Disney management announced a buyback program of up to $3 billion, 1.5% of the company’s market capitalization.

Who else thinks stocks are cheaper than where they should be? Analysts at The Goldman Sachs Group Inc. NYSE:GS AND Wells Fargo New York Stock Exchange: WFC see a respective price target of $120 and $128 each, requiring upside of 8% and 15% from today’s prices.

Can Disney return to making net margins of between 15% and 20%? It would be interesting to see where the stock goes next. If management can achieve a 10x in this metric, could the stock 10x too?

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