When investors analyze the Walt Disney Co (NYSE:DIS), they match Disney stock results against other media giants. But if it can’t close on its deal to buy most of Twenty-First Century Fox Inc (NASDAQ:FOX), that may not be the case for much longer.
Disney is, increasingly, a parks and resorts company.
Parks and resorts are the only segment of the company showing strong growth, on both the top and bottom lines. For the fourth quarter of 2017, parks and resorts represented 36% of revenue, and the company now brings in three times more revenue from resorts than from movies.
If Disney is to deliver the $1.68 per share of earnings and $14.08 billion of revenue analysts expect for the second quarter, it will be on the strength of vacationers, not viewers.
In golf they drive for show but putt for dough. Disney does entertainment for show and sells vacations for dough.
Trouble in Paradise for Disney Stock
When Disneyland workers picketed the company’s Houston shareholder meeting recently, demanding higher wages, it was a bigger story than it seemed. Labor troubles are tough for big employers.
Disney is building out its cruise fleet to rival that of Carnival Corp (NYSE:CCL). Both its main U.S. parks are adding huge new Star Wars attractions, a new Toy Story attraction is going into Orlando, and the company is expanding its festivals business to keep parks filled, at least with locals.
Shareholders seem to prefer the stability of resort income to the uncertainty of media, rejecting a higher pay package for CEO Bob Iger in an advisory vote at the shareholders’ meeting.
Tail Wags the Dog
While the movie box office grabs headlines, Disney still faces the daunting task of moving ESPN viewers from cable to streaming, preferably at higher price points, and competing with Netflix, Inc. (NASDAQ:NFLX) in entertainment streaming, matching its human touch to Netflix’ algorithms.
What a lot of Disney stock bulls are ignoring is that Disney is now getting $80 to $100 per month from various cable packages, while Netflix costs, at most, $14 per month. They are also ignoring the fact that Netflix’ technology platform includes delivery and deep cloud relationships Disney lacks.
Analysts who follow the streaming business insist Disney needs to go “all in,” and risk its earnings, to win the battle. Netflix’ market cap at $143 billion is now within touching distance of Disney’s $157 billion.
Disney’s ongoing problems with cable cord-cutting, and the uncertainty in streaming, along with the threat of Comcast Corpration (NASDAQ:CMCSA) scuttling the Fox deal by taking Sky should at least force a higher Disney bid for that asset.
A Wilder Ride
To me, this adds up to a riskier stock. Disney is relying on continued consumer strength for resort growth, and on technology for more money than that technology seems able to deliver.
Still, with a below-market price-earnings multiple of 17.5, Will Healy writes, Disney stock today is a buying opportunity. Lawrence Meyers insists that Fox content will help Disney shareholders win out.
They may be right.
The Bottom Line on Disney Stock
My own view is that general economic risks are increasing, and that Disney is late to its opportunities. Recessions always hit travel and theme parks hard, and until it can buy more content Disney is increasingly a travel company.
With Carnival trading at 18.8 times earnings and Royal Caribbean Cruises Ltd (NYSE:RCL) trading at 16.8 times earnings, I don’t see Disney stock as mispriced here.
[Editor’s note: This article has been edited to correctly state that Disney will be reporting its second quarter, not first.]
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.