I’m a big fan of the $66-billion, all-stock acquisition of the Twenty-First Century Fox Inc (NASDAQ:FOXA) entertainment assets by Walt Disney Co (NYSE:DIS). I believe it will be a significant catalyst for Disney stock over the next two to three years.
A lot’s been said and written since the deal was announced in December. Some of it was good; some of it bad. It could take up to 18 months to complete, and Disney stock has been stuck in neutral.
That’s understandable, given the company was facing some headwinds in its own business before making the deal. Completing the acquisition and then integrating the Twenty-First Century Fox assets adds a layer of uncertainty that investors don’t like.
Year to date, Disney stock is flat through February 23. In 2017, it delivered a measly 4.7% for shareholders, and the year before that just 0.6%. Annualizing at 2.1% over the past three years, it’s likely that Disney will continue generating anemic returns until the deal is consummated.
Disney Stock Looks Cheap
Disney is launching its own video streaming service in 2019, as well as ESPN Plus this spring. The two streaming services are intended to take back some business from Netflix, Inc. (NASDAQ:NFLX) and the various cable sports networks that have reduced ESPN’s dominance in live sports programming.
Personally, I think it’s about time Netflix got some competition. The assets acquired from Twenty-First Century Fox will make it a compelling adversary. Disney CEO Bob Iger is plugging a huge hole at the company.
To me, that makes DIS stock very cheap. My InvestorPlacec.com colleague Ian Bezek agrees.
“DIS stock is currently selling at 18x trailing earnings, making it significantly cheaper than the market as a whole,” Bezek wrote February 23. “And as a beneficiary of both the tax overhaul, and substantial merger savings once the Fox deal closes, analysts see that forward PE (price-earnings) ratio dropping to under 15x next year.”
Over the past three years, Disney’s traded between a range of $88 and $121; the midpoint’s about $104. If you buy a half position today, and then save some cash to buy should it slide down into the $90s, you’ll give yourself a trading strategy while waiting for the outcome.
Murdochs a Welcome Addition for Disney Stock
Ultimately, I see the deal getting the green light from the feds. In the meantime, here are three reasons why I believe the Murdochs are good for Disney stock:
One of the Largest Shareholders: Should the deal go through, the Murdoch family will be the largest or second-largest shareholder of Disney, depending on whose opinion you go by. Either way, a company like Disney should benefit from having a large shareholder that isn’t some faceless institution, much like Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) benefits from Warren Buffett’s ownership interest.
Allows for the Spinoff of ESPN: I’ve long been a proponent of spinning off ESPN so that the cable sports network could focus on rebuilding its leadership position in live sports programming, while providing Disney with cash to pay down debt.
The Murdochs are retaining their interest in Fox Sports. It’s an opportune time for Disney to help out its soon-to-be largest shareholder by removing the conflict between sports entities.
James Murdoch as Disney CEO: Currently the CEO of Twenty-First Century Fox at just 44, Rupert Murdoch’s son would make an excellent transition from Iger.
“James is in the catbird seat,” said Jeffrey Katzenberg, co-founder of DreamWorks and former Disney studio chairman. “I mean, he is one of the smartest, most articulate, most intelligent media executives today.”
Frankly, given James Murdoch’s familiarity with many of the assets that would make up the “new” Disney, I would be shocked if he weren’t at the front of the line to take over as CEO.
The only way he doesn’t is if Comcast Corporation (NASDAQ:CMCSA) steals Disney’s thunder and I don’t see that happening.
Bottom Line on Disney Stock
It would be nice to buy Disney at less than $100; that would be a real deal.
However, investors might not get the opportunity if the deal gets pushed through in less than 18 months. If you’re a buy-and-hold investor, I’d be seriously considering its stock at current prices.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.