Should You Buy Disney Stock Below $100?

It has been a tough decade for Walt Disney (NYSE: DIS) . The stock just fell below $100 again, a price it had hit all the way back in 2015. After a successful run acquiring Marvel and Pixar in the 2000s, the entertainment giant has been hurt by the transition to streaming TV, the slow decline of movie theaters, and a bloated cost base.

Over the last 10 years, Disney's stock has posted a total return of just 26%. The S&P 500 index has left it in the dust, returning 241% for investors over that same period. However, there are signs that Disney's prospects may be looking up again. Should you buy the fallen angel below $100 a share? Let's investigate further and find out.

Cost-cutting and quality over quantity

As with many large companies, Disney's expenses became overblown during the pandemic. At one point in 2021, the company posted close to $0 in operating profits, something it hadn't done in decades. Earnings declines caused the board of directors to bring back longtime CEO Bob Iger to get Disney back on course.

Iger has two main goals to improve profitability in the short run. First is simple cost-cutting. Iger aims to reduce annual costs by $7.5 billion, which is already showing up in the company's financial statements. Operating earnings have soared to $10.5 billion over the past 12 months as the company makes its way as a leaner operation.

The second goal for Iger is reducing the quantity of shows and movies it produces, but improving the quality. Related to cost cuts, it simply means not flooding the market with constant Marvel, Pixar, and Disney content that tires out the core Disney customer. So far, this looks to be working. The company recently came out with the hit Inside Out 2 , which is the best-selling Pixar animated film of all time with $1.37 billion in box office sales. Disney might release fewer Pixar movies this decade, but it hopes that more of them can repeat the success of Inside Out 2 .

Translating movie success to other business items

Disney's business model is predicated on building or buying entertainment franchises and selling them across all sorts of entertainment form factors. Its theme parks have been the cash cow, generating close to $10 billion in segment operating income on its own over the past 12 months (the segment also includes cruises). This makes up most of Disney's consolidated earnings power.

Management feels there is still a long way to reinvest in theme parks and cruises. It plans to spend $60 billion on capital expenditures for this segment over the next decade as it turns more franchises into theme park rides. If the company can create new fan favorites such as Inside Out 2 and translate them to Disneyland and Disney World, I have no doubt theme park profits will continue to climb higher in the coming years.

Other divisions have struggled for Disney in recent years. Its streaming efforts such as Disney+ and Hulu have a lot of subscribers but were deeply unprofitable due to the bad cost management a few years ago. Progress has been made over the past year, with these direct-to-consumer (DTC) applications reaching breakeven segment profitability last quarter compared to a $600 million loss in the same quarter a year ago. Again, Disney needs to take its success at the movie theater and translate it to profits at its streaming DTC applications in order for its stock to rise again.

DIS Free Cash Flow data by YCharts

Is the stock a buy below $100?

Even though it remains in a transition period, Disney is expected to generate $8 billion in free cash flow this year. That is 22x its current market cap of $177 billion, which is close to the market average for a price-to-free-cash-flow (P/FCF) ratio.

If you just took this number in a vacuum, Disney's stock does not look like a screaming buy below $100. However, there is a chance this number will be much higher within a couple of years. Before the pandemic, Disney's free cash flow hit close to $10 billion, and that is when it was trying to make a transition to streaming video. If it can keep up its quality-over-quantity strategy, reinvest a ton in the theme parks, and get streaming DTC applications to profitability, I think Disney's free cash flow can more than double in a few years.

That would make $16 billion in free cash flow, an 11x multiple of its current market cap. If you believe in the Disney profit inflection, now looks like a great time to buy below $100 a share.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy .