Patience Will Be Rewarded When It Comes to Walt Disney Co Stock

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DIS stock - Patience Will Be Rewarded When It Comes to Walt Disney Co Stock

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Despite reporting what I thought were pretty good numbers, Walt Disney Co (NYSE:DIS) stock sank again after its most recent earnings report February 6.

The drop continues what has been a multi-year sideways run in Disney stock that started in early 2015. Ever since DIS stock broke above $100 for the first time in early 2015, it has been unable to consistently hold any level higher than $100.

This sideways action makes DIS stock a huge under-performer over the past three years. While DIS stock has been flat, the S&P 500 has rallied 30% in that time-frame.

But I smell opportunity around the corner.

Disney is transforming its business, and is about to take its biggest headwind and make it a secular tailwind. This transformation will play out over the next two years, and as it does, DIS stock will roar higher because it has a lot of ground to make up — 30 points of under-performance over the past three years means good news could catalyze a bunch of buying.

As such, I’m fine with a sideways-stuck DIS stock with a 1.6% yield — for now. Over the next 24 months, this stock will roar higher. Here’s a deeper look:

Change Is Coming for DIS Stock

DIS stock hasn’t gone anywhere over the past three years because its bread-and-butter Media Networks business has been adversely affected by cord-cutting. For years, Disney’s suite of channels (namely, ESPN) over-earned. But as ad dollars have shifted to digital mediums and consumers have shifted their media viewership to over-the-top mediums like Netflix, Inc. (NASDAQ:NFLX), those days of over-earning have come to an end.

And Disney’s media business has tanked.

But Disney still owns some of the best content in the world. Think Star Wars. The Avengers. Guardians of the Galaxy. Frozen. Beauty & The Beast. All those Pixar movies, like Toy Story and Finding Nemo. Plus, Disney is adding a whole bunch of content from Twenty-First Century Fox Inc (NASDAQ:FOXA).

The problem, then, isn’t that Disney’s underlying content is losing popularity. If anything, it’s gaining in popularity if you look at box office numbers — three of the top four movies last year were from Disney. The problem is the distribution of that content.

Disney is about to fix that problem.

This spring, Disney is launching ESPN Plus, a $5-per-month streaming platform that will allow sports fan to live-stream pretty much any sporting event across ESPN’s suite of channels. This will have huge demand, because the one thing that Netflix doesn’t do is sports. Indeed, on-demand, live-streaming sports isn’t really a thing. This will be the first of its kind, and considering all signs point to continued growth in over-the-top viewership, I think demand for ESPN Plus will be huge.

Next year, Disney is launching its own over-the-top streaming service which will presumably look, act, and be just like Netflix. Except it will have all that Disney content, from Star Wars to Pixar to Marvel. It will also have all of Fox’s content. People are paying for that content en masse at the movie theater. They are also paying for it en masse at Disney parks. So why wouldn’t they pay for that content from the comfort of their own homes? Especially if Disney’s streaming service is much cheaper than Netflix.

All in all, I’m quite bullish on the growth prospects of both ESPN Plus and Disney’s streaming service. Current cord-cutting headwinds will inevitably turn into sub-gaining tailwinds, and that will turn this stock around.

Bottom Line on DIS Stock

DIS stock is trading at 15-times forward earnings. That is below its historical average. It’s also below the current market multiple. But this is a name which almost everyone agrees is one of the most recognizable and valuable brands in the world.

That is a favorable set-up going into what will be a hugely transformative next two years for Disney. At the end of that transformation, I expect DIS stock to be materially higher than where it is today.

As of this writing, Luke Lango was long DIS and NFLX.  

 

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/patience-rewarded-walt-disney-co-dis-stock/.

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