It has been a frustrating couple of years for investors in Walt Disney (NYSE:DIS). Long-term investors may not have much to complain about, with Disney stock going from $30 in 2011 to more than $100 in just four years.
It defies the logic that well-known, non-tech, non-blue-chip companies have that type of return potential. But since eclipsing $100 in 2015, DIS stock has been trapped, stuck mostly between $100 and the $110-to-$115 area.
With Monday’s 1.6% rally, shares are now near $116. Not be dramatic, but these earnings results are sort of make-or-break for Disney stock. If the results spark a positive move, DIS could build on a multiyear breakout. If they incite a negative response from investors then Disney stock could be heading back to its trading range.
Reasons for Optimism on Disney Stock?
Disney stock had been rallying like mad for years as its studio division was doing well, its dividend was seeing annual double-digit increases and its parks were full. However, streaming platforms have been the culprit behind the growth leveling out. As Netflix (NASDAQ:NFLX) rapidly added new subscribers, cable subscriptions have been declining.
Are there still reasons to like DIS stock now? I believe there are.
For starters, Disney stock trades at a reasonable valuation. Keep in mind, shares are up about 20% from the recent low, but still trade at 16 times earnings. Estimates call for about 7% sales growth this year and 24% earnings growth — the latter being a major benefit of tax reform.
Disney continues to see strong park attendance and has been raising ticket prices accordingly. Its studio division remains strong and has plenty of films in the pipeline. In 2019 alone, investors can look forward to the release of Frozen 2, Toy Story 4, Star Wars Episode 9, Avengers 4 and live-action remakes of Dumbo and Aladdin.
The company’s acquisition of a majority of Twenty-First Century Fox (NASDAQ:FOX, NASDAQ:FOXA) will add to Disney’s content library — a good thing given the theory that content is king. The acquisition will also double Disney’s 30% stake in Hulu to 60%, giving it majority ownership in a well-known streaming entity.
Further, Disney is launching several streaming options of its own.
It’s not all perfect at the House of Mouse. In 2019 analysts expect earnings and sales growth to slow to 6.6% and 2.5%, respectively. Further, its $71 billion acquisition of Fox came at a near-40% premium to its original agreed-upon offer of $52 billion. Finally, NFLX still leads the streaming wars by a wide, wide margin.
What to Focus on for Disney’s Earnings
Click to Enlarge
The first is obvious: quarterly results.
The fiscal third quarter should include a bulk of the results from recent films like Black Panther, Incredibles 2 and Avengers: Infinity War. Analysts expect earnings of $1.95 per share, which is actually down slightly over the last few months of expectations for $1.97. On the revenue front, they expect $15.34 billion in sales, up 7.8%. Let’s see if Disney can beat expectations.
The second thing to watch for is an update on the Twenty-First Century Fox deal. We’ll want CEO Bob Iger and his team to lay out a plan that gives investors confidence on its potential and integration.
Finally, also listen for an update on Disney’s streaming plans. Will its strategy with Hulu change or is it too early to tell? Is ESPN+ stemming the bleeding from cable subscription losses or is adoption relatively low? Will we get any more info on Disneyflix?
I know that’s a lot of questions, but answers on these fronts will go a long way. They will help determine whether Disney is ready for the next phase of media.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
