Companies have to spend money to maintain and enhance their competitive edges. Investors usually accept spending, even when it involves large dollar amounts, if it can generate adequate return on those investments.
The other caveat is, that in the current environment where Wall Street is punishing spenders that throw money around in the name of growth over profits, companies making sizable investments had better be profitable and generating cash. Fortunately for owners of Disney (NYSE:DIS) stock, the operator of the ABC and ESPN networks fits the bills of a profitable, shrewd spender.
Last week, the company delivered fiscal fourth-quarter earnings of $1.07 per share on revenue of $19 billion. The per share earnings number easily beat the 95 cents Wall Street was expecting. Turnover was in line with consensus estimates.
Disney stock gained almost 4% last week, pushing its year-to-date gain to nearly 25%. DIS shares are beating the S&P 500 Communication Services Index by more than 100 basis points this year.
Implications for Disney Stock
Obviously, price action in Disney stock has been impressive this year and for some, that’s enough. However, upon closer examination, investors will find more to like about Disney stock, including management’s ability to execute large-scale acquisitions.
Last year, Disney got into a bidding war with rival Comcast (NASDAQ:CMCSA) for 21st Century. The mouse ultimately emerged victorious with a staggering $71.3 billion bid. The horizontal acquisition, which closed earlier this year, brought content-rich Disney even more coveted content.
With the Fox deal, Disney, already a box office linchpin, now owns about 15 highly profitable cinematic franchises, including the Marvel films, Star Wars and many more. The Fox deal took some time to digest, but it appears to be paying off for Disney.
“Affiliate fee revenue in the quarter was up 18%, which was made up of a 15 basis points increase from the Fox assets and 7 basis points from higher pricing, with a 4 basis points decline from lower subscribers,” according to Morningstar research. “This implies a 3% growth in affiliate fee revenue, excluding the effect of the acquired Fox entertainment assets.”
Getting back to the box office, there are near-term catalysts in play for Disney stock. Frozen 2 comes out later this month and a new Star Wars installment is due out in December. The Mulan sequel is due out in the first quarter of 2020 followed by another Marvel movie in May. And for the ultra-patient Disney stock owners, Black Panther 2 is coming in 2022.
Streaming Is Disney’s Next Big Play
As has been widely noted, perhaps the premier near-term catalyst for Disney stock is the launch of the Disney + streaming service on Nov. 12. Disney + will cost about $7 a month or $70 for the year if customers pay for 12 months upfront. That’s pricier than the rival service from Apple (NASDAQ:AAPL), but less expensive, for now, than the Netflix (NASDAQ:NFLX) subscription fee.
From a content standpoint, Disney possesses massive capability and scale advantages over Apple and Netflix. While both offer original content on their streaming platforms, studio production is not a core competency for either company. Netflix’s hit-and-miss track record with its original shows proves as much.
Even without the aforementioned Fox assets, Disney had plenty of homegrown content with which to populate a streaming platform, but with those other pieces in place, the company can easily become a dominant force in streaming.
The bottom line on Disney stock? Come for the content, stay for theme parks — and expect that combination to continue bearing fruit if the current bull market holds up.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.