Walt Disney Co: Don’t Believe the Fairy-Tale Selloff, Buy Disney Stock! (DIS)

Walt Disney Co (DIS) has come under pressure as Wall Street struggled to overcome the shock of “the house that Mickey built” missing consensus estimates for the first time in five years.

Don't Believe the Fairy-Tale Selloff, Buy Disney Stock! (DIS)

Of course, some pundits are gnashing their teeth as they ponder the question of whether the company’s best days are behind it.

That’s nonsense. The selloff in Disney represents a buying opportunity for investors.

Let’s take a closer look at the bullish case for Disney stock.

Cord Cutters: I’ve said it before, and I will say it again: Cord-cutting is a slow-moving problem. According to Nielsen, the numbers of households with pay TV service shrunk from 105 million to 100 million between 2010 and 2015. While that’s not good news, it’s hardly Armageddon. Indeed, Comcast Corporation (CMCSA), the company that cord-cutters despise with a burning passion more powerful than a million suns, is holding its own in the video business, gaining 53,000 customers in the first quarter, its best Q1 performance in nine years. The company won another 89,000 in the fourth quarter.

ESPN and Cable Networks: “The Worldwide Leader in Sports” continues to mint money for Bob Iger & Co. Operating income in the cable business surged by 12% in the quarter to $2 billion, as costs fell and affiliate revenues rose. One way that ESPN has managed to control costs, much to the horror of some fans, has been in jettisoning high-priced talents such as Bill Simmons and Keith Olbermann. Although ESPN is the most expensive cable channel for providers to carry, cable and satellite companies will continue to offer ESPN on so-called skinny channels. The timing of the College bowl games pushed down ESPN’s ad revenue by 13% in the latest quarter. ESPN’s ad sales are rebounding in the current quarter and appear poised to rise 5%.

Consumer Products: The unexpected weakness in this business caught many on Wall Street by surprise who expected the company to reap the rewards of the popularity of some of its recent films, such as “Star Wars: The Force Awakens” and “Zootopia.” It appears as though analysts failed to calculate the timing of licensing revenue properly. Disney’s decision to quit the video game business, where it has struggled for a while, should help improve the balance sheet at this business.

Parks & Resorts: Revenue at the Disney theme park business came in at a disappointing $3.93 billion. Operating income rose 10% to $624 million fueled by the strong performance at its domestic theme parks and the Disney Cruise lines. The company continues to invest in this business as it prepares to open its newest park in Shanghai. Again, the miss appears to be due to the shifting of the timing of the Easter holiday, which DIS obviously can’t control.

Management Team: Although the recent departure of COO Tom Staggs has raised concerns about succession planning, I doubt that many DIS shareholders would complain about another year or two of Bob Iger. Keep in mind that Disney hadn’t missed Wall Street’s earnings expectations in five years, a remarkable record for sure. Iger, though, isn’t overstaying his welcome and indicated that he isn’t staying beyond June 2018 when his contract expires.

The icing on the cake is that Disney stock currently trades at a price-to-earnings multiple of 19, which is under the industry average of 24 and below its five-year high of 21. That valuation is attractive enough for investors to add Disney stock to their portfolios.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/disney-stock-dis-earnings-2/.

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