Shares of Walt Disney Co (NYSE:DIS) have not had an easy time over the past few years. With worries over cord cutting, the Walt Disney stock price has languished between the mid-$90s while topping out near $115 to $120. Is it time we bail on the House of Mouse?
I don’t think so, and there are a few reasons why. Let’s start with content.
Movies Aren’t Dead
Disney has always been a monster when it comes to its film slate, and 2017 and beyond is no different. For starters, its new Pixar film Coco is shaping up to be a multi-film franchise going forward. This week, Coco did $26.1 million in U.S. box office sales. It’s now pulled in more than $108 million over the last 10 days and another $171 million overseas.
Many investors were lamenting the company’s live-action films of Jungle Book, Beauty and the Beast and others. Not because they weren’t money makers — they are — but because it (supposedly) showed a lack of creativity and Disney possibly being out of ideas.
My view is that it only extends the runway for these franchises and gives the company more return from its original creation.
Further, look at what Disney has been able to do. Toy Story made its debut in 1995, and in 2019, Toy Story 4 is slated for release. That’s a lot of longevity, not including licensing fees and royalties for toys and games. Further, The Incredibles, Cars, Moana, Zootopia and Frozen are all newer films and can (or have) developed into franchises. The latter two were billion-dollar hits.
I see Pixar and other Disney animation films continuing to churn out winners. Coco is just the latest in the string of hits. Given its reviews — 96% on Rotten Tomatoes — it wouldn’t be surprising to see another film down the road.
Disney and Fox
Apart from creating its own streaming applications, separating from Netflix, Inc. (NASDAQ:NFLX) and owning a 30% chunk of Hulu, Walt Disney Co may turn to M&A to further its content portfolio. Specifically, it’s looking to purchase most of Twenty-First Century Fox Inc (NASDAQ:FOXA, NASDAQ:FOX).
Some assets would be off-limits thanks to Disney already controlling a sizable portfolio of content to begin with. These assets would include cable networks like Fox News and FS1. However, Disney is very much interested in buying Fox’s movie and TV studios, as well as a few cable stations and foreign TV providers.
The studio segment is exciting, given Disney’s ability to extend franchises and license the content. Kung Fu Panda, X-Men (which is a great tie-in with Marvel), Ice Age and a slew of other hits are just some of FOX’s franchises. The content creators at Twenty-First Century Fox are good and have crushed the box office multiple times.
Perhaps most important, though, is the Avatar series, which is slated for four more films between 2020 and 2025. Given Disney’s theme-park connection to Avatar and the franchise’s multibillion dollar potential, this would be a huge addition to the portfolio.
Enhancing that value would be Star Wars, an engine Disney plans to rev back up once its current slate of movies cools down after 2020. Long-term investors can sleep soundly know that there’s loads of Marvel, Star Wars, animation and possibly Avatar movies in the pipeline.
Trading Walt Disney Stock
With the 5% jump in the Walt Disney stock price Monday, we’ve had to take another look and redo our chart (see below) from the weekend. DIS stock originally jumped after earnings a few weeks ago. While we are long-term bulls in the name, we liked the quarter and were buyers in the low $100s.
Click to Enlarge
With Monday’s move, the Walt Disney stock price closed just north of $110. It’s in part because of the tax bill, but also on optimism Disney will find a way to land Twenty-First Century Fox assets. Investors that missed the boat can try a few things.
First, they could buy near current levels and plan to hold for the long term. Disney will combat cord-cutting issues and lead the way into the next generation of content. Second, they could play for a correction down to $106. This moderately important level has been both resistance and support, with the latter hopefully kicking into gear on a pullback.
Personally, if I’m investing for the long, long term, I wouldn’t worry about a few dollars per share, (i.e., $106 vs. $109).
If investors can lower their cost basis to $108, I would call it a win. A 10% rally from Friday’s close would take the Walt Disney stock price to around $115. A 10% rally from here would bring it back near its all-time highs around $122.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in DIS.
