Is Disney Stock a Buy After the Fox Deal? 3 Pros, 3 Cons

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DIS stock - Is Disney Stock a Buy After the Fox Deal? 3 Pros, 3 Cons

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Congratulations are in order for Disney (NYSE:DIS) after it won the bidding war for Fox’s (NASDAQ:FOXA) assets. Disney beat the competition, enabling it to bring home the bulk of the assets. On the other hand, it had to pay a large amount of money to seal the deal. Did Disney make a shrewd move or was its offer too undisciplined? That’s not the only question which will affect DIS stock going forward.

How much time will it take DIS to get its balance sheet back to full strength? The company’s share buybacks are suspended for the time being, removing one source of support for DIS stock. On the other hand, there are some positive signs for the bulls as well. The company’s earnings were really quite good, despite the negative headlines. Moreover, if the Fox deal works out, it will be a game-changer. And additionally, DIS stock is on the verge of a massive breakout. Let’s dive into the details.

The Cons of DIS Stock

Cord-Cutting Is Intensifying: Research firm eMarketer recently put out a sobering report on the future of the cable industry. The firm estimated that 33 million Americans will have eliminated their cable service by the end of this year. It expects that figure to rise to 50 million in 2021 and 55 million by the end of 2022. Put another way, one in seven American adults do not have a pay TV service today, and that figure is expected to jump to more than one in five over the next few years.

This is, obviously, problematic for Disney. While the company has many business divisions, analysts are focused on ESPN. The sports network has been the company’s cash cow in recent years. However, as cord-cutting intensifies, the value of ESPN keeps shrinking. Disney is making moves to come up with a streaming package that will replace the lost ESPN revenues, but it doesn’t seem like the conglomerate has gotten the product mix right yet.

Disney Had to Pay Up for Fox: You could argue that Comcast (NASDAQ:CMCSA) was the biggest winner of the Disney-Fox deal. Why is that? Originally, Disney intended to acquire Fox’s assets for $52 billion. Once Comcast got involved, Fox’s asking price surged. Disney is now coughing up $71 billion, or $19 billion more than originally planned.

Given that Disney’s market cap is around $170 billion, just the price hike alone amounts to more than 10% of Disney’s total market cap. That’s a rather expensive bump. One of Disney’s strengths has been its diversification across many markets, including content, television, and theme parks. But by paying so much for Fox, Disney may be concentrating its forces in the wrong place as the threat from Netflix (NASDAQ:NFLX) continues to grow.

DIS Stock Is Cyclical: Many investors fail to appreciate the extent to which Disney’s fortunes are tied to the economy. When consumers are struggling, Disney fares poorly. During the fallout from the financial crisis, for example, it took five years for Disney’s earnings per share to exceed the highs set during the previous economic expansion.

That’s because, while Disney has a diversified business, almost all of its revenue streams are tied to consumer spending. All of Disney’s major businesses, including ESPN, Star Wars action figure sales, and Disney World tickets, take a hit if consumer spending dips. With gas prices on the rise, consumer spending could be pressured sooner than expected. And the economic cycle is already quite extended. Once things roll over, expect Disney’s earnings to level off or decline outright.

The Pros of DIS Stock

The Fox Deal Gives Disney a Real Opportunity in Streaming: I’ve been skeptical about Disney’s streaming strategy for awhile. It doesn’t seem to have one cohesive offering yet. It’s doing one thing with Hulu, another with ESPN, and a third with its own kid-friendly Disney content. That could work, but in the end, I expect consumers to prefer the simplicity of an all-in-one package rather than a bunch of smaller subscriptions. Netflix doesn’t have to have all the content in the world, as long as it has enough to satisfy most users most of the time.

That said, buying Fox’s assets gives Disney tons of new media to work with. Disney has obtained fresh cable channels, sports rights, and movies, among other goodies. If anyone can top Netflix in streaming, Disney, armed with Fox’s additional content, is probably the best-positioned competitor. Additionally, Fox’s stake in European and other international media gives Disney a much-needed foothold in overseas markets, where Netflix has run out to a huge lead.

Disney’s Earnings Were Pretty Good: Yes, Disney’s third-quarter revenues and net income came in below analysts’ consensus estimates. But the analysts’ projections were really bullish.

Once you look at the actual results, they are impressive. Disney’s EPS rose 18% year-over-year, excluding certain items, and its net income grew 23% YOY, for example. The revenues of three of its four major operating segments grew strongly, with only consumer products failing to pull its weight. Disney’s business is still showing strong underlying momentum.

Nearing a Technical Breakout: DIS stock has had trouble getting over the $120 level. It first hit this level, twice, in 2015 and stopped dead cold against it both times. Last year, it again topped $115 before again slumping back to $100.

Now, however, DIS stock is quickly approaching $120 again. And the broader market, the latest Turkey selloff aside, has been pretty strong in recent weeks. Investors have been rotating out of tech stocks into more conservative, dividend-paying, blue chip names. DIS stock fits this rotation perfectly. With any sort of good news, DIS stock should be able to top $120, hitting new all-time highs and triggering a strong technical move to the upside.

The Verdict on DIS Stock

Don’t worry too much about the immediate, negative reaction to Disney’s earnings. The results were good enough; analysts were just expecting a blowout quarter. All of the pieces are still in place for a major technical breakout, with DIS stock moving to new all-time highs, as long as market weakness doesn’t interfere.

That said, over the longer haul, Disney has real challenges. It’s doubling down on content and streaming. That amps up the risk to the story, as the theme parks, consumer products, and other divisions lose relevance. Disney needs to make streaming work for the stock to be a big, long-term winner. And Netflix, Disney’s biggest competitor, is still executing brilliantly. It’s hard to buy and hold DIS stock unless you’re confident Disney can topple Netflix from the streaming throne.

At the time of this writing, Ian Bezek held none of the aforementioned securities.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/is-disney-stock-a-buy-after-the-fox-deal-3-pros-3-cons/.

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