Historically, the S&P 500 index has produced an annualized return of about 10%. But in the past five years, the gains have been supercharged, translating to a roughly 15% yearly return. It’s reasonable to expect a reversion to the mean at some point.
But investors still have the potential to achieve huge returns by focusing on the right businesses to buy. In fact, there’s one beaten-down stock, which currently trades 57% below its all-time high, that I believe can double your money over the next five years.
The struggles are hard to ignore
While I’m bullish on Walt Disney (NYSE: DIS), the past few years for this company might be a case study on strategic missteps. I can identify three key areas that investors must know.
For one, Disney spent a whopping $71.3 billion to acquire film and TV assets of 21st Century Fox, a deal that closed in early 2019. The business certainly gained valuable content, but a sizable portion of the deal’s earnings came from traditional cable TV, a dying market. And it added $19.2 billion of debt to Disney’s balance sheet.
The other blunder has to do with streaming. Disney+ wasn’t launched until November 2019. Although it’s added subscribers quickly in the past five years, now totaling 118.3 million (excluding Hotstar), CEO Bob Iger and his team should’ve recognized several years before 2019 that the industry was changing and streaming was taking over.
I’ll call out the musical chairs in the C-suite as another cause for concern. Iger stepped down from the CEO role in February 2020, only to come back in November 2022. Disney appears to have trouble coming up with a viable succession plan.
The negative developments I just described, which add uncertainty to the outlook, make it easy to understand why the market is pessimistic. Adding fuel to the fire is the fact that both the S&P 500, and a top competitor in Netflix, have generated positive investment returns since Disney hit its peak price in March 2021.
The future looks bright
Investors should understand and accept the challenges facing Disney. But if you spend less time worrying about the next quarter or even year, and instead turn your attention to the next five years or more, there is a lucrative buying opportunity here.
In fiscal 2020, the business reported a diluted earnings per share (EPS) loss of $1.58, a low point. There’s been substantial improvement since, as adjusted diluted EPS totaled $3.76 in fiscal 2023 and $5.56 on an annualized basis in Q3 2024. And I believe that this will continue, now that the streaming operations are generating positive operating income, coupled with management’s focus on expense cuts.
Don’t forget that the legacy networks and the experiences segment (parks, cruises, consumer products) carry stellar operating margins of 37% and 26%, respectively.
Disney also deserves credit for consistently paying down its debt. As of June 29, the company carried $47.6 billion of debt on its balance sheet, notably lower than a few years ago. With forecasted free cash flow of $8 billion in fiscal 2024, which would be 63% higher than last fiscal year, the business is heading in the right direction.
Take advantage of the valuation
Disney’s shift to streaming has been a painful one thus far, as the business must continue to foster direct-to-consumer growth but at the same time milk its linear networks for all the profits that it can. But I’m optimistic that it can keep the positive earnings going with its legacy business line, while also working toward expanding its DTC margin. Last quarter was a good first step.
Investors can have some peace of mind knowing that Disney has an economic moat protecting its competitive position. I don’t believe the company’s intangible assets, namely its brand and intellectual property, can be replicated. This is a unique enterprise.
Given that the market hates uncertainty, it makes sense why Disney shares have gotten hammered. With clear growth in the horizon, consensus analyst estimates call for adjusted diluted EPS to rise at a yearly rate of 16% between now and fiscal 2029. I don’t believe it’s a stretch for that pace to continue even after that. The current share price is less than 11 times the fiscal 2029 adjusted diluted EPS projection of $7.90. Assuming Disney fetches the current 23 multiple of the S&P 500, investors are looking at a clear path to a doubling of the stock price.
Should you invest $1,000 in Walt Disney right now?
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Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.
Prediction: Here’s 1 S&P 500 Stock That Can Double Your Money in 5 Years was originally published by The Motley Fool
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