Life is grand if you’re Disney’s (NYSE:DIS) CEO Bob Iger. Let’s get the obvious out of the way: anytime you’re the head executive of one of the most recognizable brands in the world, you’re doing alright. More specifically for DIS stock, a Dow Jones laggard has suddenly become a bright spot for the venerable index.
Heading into its third-quarter fiscal 2018 earnings report, Disney was up nearly 8% for the year. That put it just outside the top ten, behind JPMorgan (NYSE:JPM) and above Intel (NASDAQ:INTC). Moreover, since the beginning of June, DIS stock has skyrocketed nearly 18%. On Monday, shares closed up 1.6% against the prior session.
Most signs point to at least a very positive Q3 conference call, if not an outright beat on key metrics. Of course, Disney received a major credibility boost when it won a “clash of the titans” with archrival Comcast (NASDAQ:CMCSA). Both stalwarts fiercely competed for the right to buyout Twenty-First Century Fox’s (NASDAQ:FOXA) entertainment assets.
Previously, I argued that Disney now has a “virtual entertainment monopoly” and I stand firm in that assessment.
Most media experts cite the obvious negative impact that Netflix (NASDAQ:NFLX) and content-streaming companies have rendered on traditional TV providers. This headwind is understandable because content streaming essentially replaces traditional TV with a more convenient and cheaper platform. But the big screen, while it has endured, and will continue to endure a difficult transition, offers a unique experience. Netflix can’t replicate that intangible, box-office aura, which gives Disney an important edge.
All the company has to do now is to provide popular content, which the Fox deal cemented.
That said, some analysts have concerns that DIS stock is temporarily overheated. How, then, should you approach shares just ahead of Q3?
Strong Positives for DIS stock
On Monday’s trade, volume reached nearly 12.7 million shares, a higher-than-average haul over the past month. This indicates strong sentiment towards DIS stock despite management taking on an expensive, but necessary risk with Fox.
For Q3, consensus estimates put its earnings per share at $1.95. This is nearer the lower end of individual estimates, which ranges from $1.81 to $2.14. In the prior-year quarter, Disney delivered EPS of $1.58, which beat consensus at the time by three cents.
On the revenue side, covering analysts expect the media giant to haul in $15.3 billion. Consensus here was slightly near the upper range of estimates, from $14.8 billion to $15.7 billion. In Q3 2017, Disney registered $14.2 billion in sales.
Should the company hit its sales target, this would represent almost an 8% year-over-year lift. That should be more than doable. According to Zacks.com contributor Benjamin Rains, Q3 “will include revenue from Black Panther, Avengers: Infinity War, and Incredibles 2. These three films alone accounted for $1.8 billion domestically as of the end of June, according to data from Box Office Mojo.”
As I’ve discussed in prior articles for InvestorPlace, changing consumer behaviors haven’t destroyed the movie industry; rather, they’ve forced Hollywood to focus largely on what people want. And what people want right now are comic-book based movies and Star Wars. The Fox acquisition brings the most popular entertainment franchises under one umbrella, making DIS stock incredibly formidable.
I don’t think it’s any coincidence that DIS has enjoyed a believable resurgence, while Comcast shares are still broadly struggling.
Moreover, ancillary firms involved in the sector have shown significant improvement. For instance, cineplex-advertising firm National CineMedia (NASDAQ:NCMI), while missing its earnings expectations, delivered a robust 17% YOY revenue gain. This further bolsters Disney’s strategic moves.
Watch Out for Legacy Risk factors
Although the longer-term sentiment towards DIS stock appears positive, not all is bright at the Magic Kingdom. Analysts will focus keen eyes on the company’s legacy media businesses. Disney is transitioning towards streaming content, but in the meantime, it faces the same cord-cutting pressures as its rivals.
According to U.S. News contributor Wayne Duggan, the Street is particularly interested in Disney’s sports-streaming service ESPN+. Duggan writes, “The success or failure of ESPN+ could be a telling predictor of the difficulty that awaits Disney when it launches its TV and movie streaming service next year.”
Depending on the upcoming conference call’s tone, and how successfully management communicates their long-term strategies, DIS stock is poised for a strong move in either direction.
But I think the key here is content quality. We already know that sports viewership is on the decline, and ESPN is a laggard among laggards. I’m not sure that it makes much sense for the markets to continue punishing DIS stock on old news.
What I am firm on is the company’s entertainment portfolio. Whether you look at the box office or the streaming market, Disney levers an enviable library. If that story shines through, DIS stock will do just fine.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
