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In a letter on Tuesday, Dan Loeb’s Third Point said that at the current price, Walt Disney (NYSE:DIS) is trading for “little more than the stand-alone value of its Parks business.”
Back in August, Third Point disclosed a stake of roughly $1 billion in Walt Disney, stating it planned to push the media company to make some changes, including a spin-off of ESPN.
Third Point explained in today’s letter that the current price is “a mere 15x ’24 “street” consensus.”
“The company remains early in its Direct to Consumer (“DTC”) transition with a leading market position, and yet the current stock price ascribes negligible value to the streaming business,” the hedge fund explained. “We believe this is due to questions around the terminal economics of streaming, given large losses being generated today at Disney (>$1 billion dollars last quarter) and stagnating margins at peers such as Netflix (NASDAQ:NFLX).”
In addition, they said Disney’s current valuation suggests the market remains skeptical.
“Disney only trades at ~14x the $7 in earnings generated prior to the Fox acquisition, which implies investors don’t expect earnings to meaningfully exceed this figure in the coming years. Hence, the first value driver we highlighted in our last letter is the opportunity for management to optimize Disney’s cost base to drive earnings growth,” Third Point added.
The firm believes Disney has “ample means” to rationalize costs across its operating platform and “deliver targeted content for home viewing that does not entail the same cost structure of exclusive theatrical releases.”
However, moving away from its previous stance, the fund said they have now come to agree with Disney’s management that “ESPN belongs with the company at this time.”
” The cash flow from ESPN funds the streaming losses and supports the balance sheet ahead of the Hulu purchase. In exchange, the scale and diversification of Disney provides aircover for ESPN to experiment through the initial phases of its inevitable ‘unbundling’ from linear to DTC,” Third Point continued. “DIS shares currently reflect very little value from ESPN. As the best brand in sports, ESPN is well-positioned to become the leading end-to-end DTC distributor of sports content in the US.”
