Like most of the stock market, Walt Disney Co (NYSE:DIS) stock hasn’t been a big winner over the past few weeks. In the case of DIS stock, shares are down about 7.5% from its highs. So it hasn’t been a total disappointment. Should we view DIS stock as a half-full or half-empty situation? Let’s take a look.
Disney missed on revenue expectations as sales grew 3.9% year-over-year. Earnings of $1.89 per share came in ahead of estimates by 28 cents. But it was comments about its ESPN Plus streaming service that caught most investors’ attention.
Disney’s Streaming Efforts
The company plans to unveil the platform later this spring. At $4.99 a month, it’s not going to cost consumers a lot of money at first. While this may not translate to robust revenue, it could help stem the bleeding from its traditional TV subscriber revenue.
But without being able to watch top-level games on its ESPN channels (like marquee NBA or college football games), the Plus platform loses its zeal a bit. If it were to include these matchups, I’d bet customers would be willing (and eager) to pay more for it.
This brings up the question of streaming in general. BTIG analyst Rich Greenfield recently hit Disney stock with a sell rating and reiterated his buy rating on Netflix, Inc. (NASDAQ:NFLX). I don’t necessarily agree with his conclusion, but his point was noteworthy. He said Disney’s refusal to go all-in on streaming will hurt it in the future.
While I believe Disney’s acquisition for most of Twenty-First Century Fox Inc (NASDAQ:FOXA, NASDAQ:FOX) will be advantageous from a content perspective, its lacking adaption of streaming is disappointing.
Admittedly, management has said another streaming platform for Disney content will appear alongside ESPN Plus at some point in the future. Assuming a similar price point, I think this product will attract more customers. Why? Families that have young children or are big fans of Disney movies themselves likely won’t hesitate to shell out $5 to $10 a month for this service.
My problem with ESPN Plus? Hardcore sports fans won’t need the service, and it won’t be enough to entice casual sports fans. If the product has a good user interface, that should mean future streaming platforms should too, which is promising. But as it stands, ESPN Plus likely won’t be a needle-mover.
Valuing DIS Stock
Aside from ESPN Plus and a Disney streaming platform, DIS will own 60% of Hulu assuming it receives the 30% that Fox owns in its acquisition agreement. That will leave it with three platforms. Hulu lost almost a billion dollars in 2017, but it’s a fight for market share, not profits.
Thankfully, Disney has plenty of that. The company’s studio division remains strong, and its Black Panther movie has blockbuster written all over it. Its parks continue to churn out massive attendance levels, and it even recently raised park prices. While this is drawing criticism from park goers, attendance should remain strong so long as the economy continues doing well.
Ultimately, analysts expect earnings of $6.91 per share in 2018 and $7.53 in 2019. That’s good for 21% and 9% growth for those respective years. Forecasts call for 6.1% revenue growth this year and 2.7% next year. So while there are question marks surrounding Disney’s future in streaming, it’s clear the House of Mouse remains incredibly profitable.
Even better than its profitability, though? Its valuation. Disney stock trades at less than 15 times this year’s earnings estimates. 15 times earnings for 21% growth sounds good to me. And unlike the massive hole NFLX is digging in free-cash flow (FCF), DIS sports a healthy FCF. Disney generated more than $9.5 billion FCF over the past 12 months.
Trading DIS Stock
So how do we trade DIS stock? The $100 level is holding up as support for Disney, while $113 is still acting as tough resistance. Traders and long-term investors alike can consider buying Disney stock near current levels.
The only difference is, traders can use a stop loss on a close below this vital level of support. Long-term investors may want to consider adding to their position if DIS stock falls to $96.
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Disney has been chopping around in this range for a while now. The FOX acquisition will make things more complicated given that it’s being done in a stock transaction. Still, if you’re a long-term thinker, DIS stock is a blue-chip name. Its content is considered the king of media. The company pays a modest 1.6% dividend yield, and above all, shares are cheap.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in DIS.
