Mickey Mouse will turn 90 later this year. Yet Walt Disney Co (NYSE:DIS) investors have not been celebrating. For the year so far, Disney stock is off by 3%.
And yes, the company is facing some tough challenges. Note that the company’s proposed acquisition of most of the assets of Twenty-First Century Fox Inc (NASDAQ:FOX) may not succeed.
Rival Comcast Corporation (NASDAQ:CMCSA) has made a $41 billion bid for Sky, which is partially owned by FOX. Disney CEO Robert Iger has said that this asset is the “crown jewel” of the deal.
Unfortunately, there is something else that has been a drag on Disney stock; the secular trend of cord cutting. As seen with the huge success of Netflix, Inc. (NASDAQ:NFLX), consumers want more choices and affordable options.
Other mega tech operators like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) have also been spending aggressively on their own video offerings.
The result is that there has been significant pressure on Disney’s Media Networks Group, which includes cable and broadcast assets. Keep in mind that last year about 42% of revenues and 46% of operating income came from this business.
Although, while these trends are serious, Disney still has some major advantages. If anything, the stock price really does look like a good opportunity, especially for those investors with a long-term focus.
So let’s take a look:
DIS Stock Advantage #1 – M&A Prowess
The Fox deal makes a lot of sense for Disney. Besides the Sky division, there are other key assets like film franchises (Avatar and Marvel’s X-Men), TV shows (Empire, Modern Family, American Horror Story: Roanoke and American Dad) and animation (Ice Age and Rio).
Now it’s far from clear who will ultimately win the battle for FOX. The issues are highly complex, including potential hurdles like antitrust violations.
But over the years, Iger has demonstrated his ability to strike great deals. Just look at his track record with Marvel, Pixar and the Star Wars franchise from George Lucas.
Besides, the FOX deal is not a make-or-break for Disney stock. As InvestorPlace.com’s Laura Hoy has noted:
“Not only does Disney appear to be more than capable of going it on its own in the streaming space, but Disney also has a hugely successful theme park business that brings in more than a third of its total revenue at the moment.”
DIS Stock Advantage #2 – Streaming
I think the streaming revolution is more of an opportunity then a threat for Disney stock. It’s important to note that the company has been taking major steps to get ahead of the curve. To this end, the company purchased BAMTech, which operates a leading platform for streaming.
But of course, Disney has a tremendous treasure trove of content. True, it may not have the quantity of titles of NFLX. Yet this should not matter. Let’s face it, consumers want engaging, high-quality content. And Disney has this in spade.
As for the company’s streaming strategy, it includes the launch of two offerings. One will be for ESPN, which will likely be a niche play. It is planned to be rolled out this year.
Then in 2019, Disney will launch its entertainment streaming service – and this is likely to move-the-needle. It should provide a nice source of recurring revenues but also allow the company to get a better understanding of its audience.
DIS Stock Advantage #3 – Financials and Valuation
Disney is likely to see steady growth over the years. After all, the theme Parks and Resorts business remains solid. During the latest quarter, revenues increase by 13% to $5.2 billion and operating income rose by 21% to $1.3 billion.
What’s more, the streaming business should help perk-up the growth rate and offset some of the negative impact of the cord-cutting trend.
Finally, the Disney stock price today is at reasonable levels, with the forward price-to-earnings ratio at about 14X. This represent a considerable discount to the S&P 500, which trades at 19X.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.