The Rally in Disney Stock Is Just Getting Warmed Up

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Disney stock - The Rally in Disney Stock Is Just Getting Warmed Up

Source: Richard Stephenson via Flickr (Modified)

For several years between early 2015 and mid 2018, shares of entertainment giant Disney (NYSE:DIS) were stuck in neutral. The company was plagued by cord-cutting headwinds which depressed its biggest operating segment (Media Networks). That caused earnings growth and Disney stock to fall flat.

But, investors are betting that this era of sideways trading for Disney is about to end.

From early June 2018 to early August 2018, Disney rallied from below $100 to above $115. Investors were starting to express optimism regarding the 2019 launch of Disney’s direct-to-consumer (DTC) streaming service. But, that rally was short-circuited in early August by unexciting third quarter numbers.

Investors, however, shouldn’t worry about those third quarter numbers not being exciting. Disney stock’s biggest catalyst, the DTC streaming service, won’t launch until 2019, so the numbers won’t get a big lift until then. Meanwhile, Q3 numbers weren’t that bad, and there are signs that the struggling Media Networks business is actually stabilizing.

If that business does stabilize in 2019, and Disney’s DTC streaming service launches with a bang, then Disney could be in store for huge gains over the next 12 to 24 months.

Disney’s Numbers

Despite the negative stock price reaction, Disney’s third quarter was actually pretty good.

The Parks and Studio businesses continue to do extremely well, as the company’s robust movie line-up is not only driving massive box office attendance, but also drumming up consumer enthusiasm and driving incremental traffic to Disney’s suit of amusement parks and resorts.

This positive dynamic should persist in the near to medium terms, with big blockbuster Marvel movies like Captain Marvel and Infinity War 2 on the horizon.

Meanwhile, and more important, Disney’s Media Networks business is showing signs of stabilizing. Revenues in the quarter were actually up 5%, versus up 3% year-to-date. Operating profits were down just 1%, versus down 6% year-to-date.

In other words, Disney’s strengths are naturally getting stronger. But, so are its weaknesses.

The whole reason Disney stock has been stuck in neutral despite super-charged results in the Parks and Studio segments is downtrodden results in the Media Networks business. If those downtrodden results take a positive turn, then DIS stock should also take a positive turn.

Disney Streaming Will Be Huge

The whole bull thesis on Disney stock is rather simple, and is as follows:

Disney has been getting its butt kicked by Netflix (NASDAQ:NFLX) for several years. But, Disney owns some of the most best content franchises in the world, and produces the world’s most watched movies.

Thus, Disney will eventually launch its own DTC streaming service, and use it robust content portfolio to take share back from Netflix. Plus, the traditional cable business will eventually moderate, and a stabilized cable business plus a super-charged streaming business will power Disney stock higher.

All signs point to go on this bull thesis playing out over the next several years.

Data suggests that more than half of all U.S. households have a streaming service. Among those households, they subscribe to three SVOD platforms, on average, and around 80% of them still have some form of pay TV.

The implications of that data are that not only will Disney streaming be adopted alongside Netflix (households support multiple streaming subscriptions), but that the cable business can actually stabilize as the streaming business ramps (most streaming households still have cable).

Thus, over the next several years, Disney’s hugely profitable Media Networks business will stabilize, and the streaming business will ramp to 10 million, 20 million, 30 million, and potentially more members.

Disney Stock Has Big Upside Potential

The future is bright for Disney. And it is even brighter for Disney stock.

Disney currently trades at 16X forward earnings. That is below this stock’s five year average forward multiple of 17X. But, that five year average incorporates the early 2010’s when valuations were relatively small, and more recently when Disney’s valuation was held back by cord-cutting concerns.

From 2013 to 2015, when sentiment surrounding Disney stock was strong, this was a stock trading at 18X to 20X forward earnings.

I think Disney can get back to those levels over the next twelve to twenty four months if the cable business stabilizes and the steaming business ramps. I also think that earnings by fiscal 2020 will come in ahead of expectations (current consensus is $7.65).

Put those two together (19X forward multiple and EPS north of $7.65), and you get to a price tag for DIS stock north of $145 in roughly a year. That is big upside from today’s $110 levels.

Bottom Line on Disney Stock

The traditional pay TV business is stabilizing. The streaming business is set for a big ramp. And, most importantly, Disney stock has a ton of upside potential over the next several years.

As of this writing, Luke Lango was long DIS. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/disney-stock-warmed-up/.

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