Over the past year, Disney (NYSE:DIS) \has rewarded long-term investors well as the share price is up about 30%. On Nov. 26, 2019, Disney stock hit an all-time high of $153.41. Now it is hovering at around $144.
And investors are wondering whether they can expect the shares to make new highs around the Q1 FY20 earnings report, expected on Feb. 4. Considering the up move in the stock in recent months, I am now willing to be patient before I start buying into the shares.
When the company reported Q4 earnings in early November, it beat on top and bottom lines. Revenue hit $19.1 billion vs. $19.04 billion expected. Adjusted EPS came at $1.07 vs. 95 cents expected.
Analysts scrutinized the four segments that generate Disney’s revenue:
- Media Networks (such as ABC and ESPN; 32.7% of revenue)
- Parks, Experiences & Products (such as Disneyland and cruise lines; 33.4% of revenue)
- Studio Entertainment (including Lucasfilm, and Marvel; 16.6% of revenue)
- Direct-to-Consumer & International (including Disney Store, and ESPN+; 17.3% of revenue)
The company’s new streaming service, Disney+, was also launched in mid-November. Now, the company has three streaming platforms: Disney+, Hulu, and ESPN Plus. Therefore, investors will especially be looking at the actual post-launch subscriber numbers from Disney+ as well as management’s guidance on the trio of platforms for the coming quarters.
One of the headaches at Disney in 2019 was the inconsistent attendance trends at the theme parks. Therefore, shareholders are hoping that the numbers would bounce back and stay consistent.
In the past few years, the company has added significant debt to the balance sheet. Therefore, investors will look at how management is using cash flows to repair the balance sheet.
Unless the stock reports extremely robust earnings in February, investor enthusiasm for the stock may be subdued.
Tailwinds for Disney Stock
Disney+: In the first few days following the launch of Disney+ the number of U.S. subscribers went over 10 million. And now the Street is predicting that the platform’s global subscriber numbers may in a few years surpass Netflix’s (NASDAQ:NFLX) current domestic base which stands at 60 million.
The service includes original movies and TV shows from Disney’s wealth of brands. There are likely to be very few households that would not be familiar with Disney’s franchises as they decide on a streaming platform.
In late 2019, Disney announced a partnership with Verizon (NYSE:VZ) whereby it would offer the wireless carrier’s customers a free year of Disney+. This partnership will no doubt help subscriber growth.
Brand Power: Disney enjoys tremendous brand recognition globally. Within the past decade, Disney has been adding to its entertainment empire, and I regard Disney stock as one of the key names with strong cash flow generators.
CEO Bob Iger, who has been credited with building up Disney’s intellectual property (IP) space, is upbeat about the branded content on Disney’s ecosystem. The IP power also translates into monetization capabilities.
For example, especially in the second half of the past decade, Disney has simply dominated the box office, releasing one blockbuster after another. Recent days have seen Star Wars: The Rise of Skywalker, the ninth episode in one of the most important franchises in film history, pass the $1 billion mark.
Needless to say, the monetary success does not stop at the box office as the group sells a range of merchandise, creates theme park attractions, and finally adds the content to its streaming platforms.
What Could Derail Disney Stock Price?
Short-Term Profit Taking: If you are an investor who also pays attention to technical charts, Disney stock’s price action urges caution. It’s almost impossible to time a top and a bottom in the markets. But it is likely that there might soon be a leg down, taking the shares toward $135-$140.
Also, Disney’s forward P/E currently stands at over 26. Although it is not overly rich, from a risk/return profile, I’d be more comfortable with a number between 20-25.
Finally, some investors will likely be concerned about Disney’s dividend. In general, December is the month when the company ups its annual dividend. In December 2019, this increase did not come, i.e., Disney froze its dividend.
Although the company could still end up increasing the dividend in its July declaration, the Street believes that management is likely to use the cash flow to pay down the current debt.
For investors who follow a dividend growth strategy, the dividend freeze would not be welcome news. Therefore, some may decide to move their capital to other higher dividend stocks.
SEC Investigation: There is an ongoing Securities and Exchange Commission (SEC) investigation on Disney. In August, a former Walt Disney Company accountant filed several whistleblower tips with the SEC as she claimed that Disney has been systematically inflating revenue for years, especially in the parks and resorts.
Such an investigation is likely to take several months and the general public may not know the full results for some time. However, if the claims end up having an adverse outcome, it’d be safe to assume that investors will first sell the stock and ask questions later. Therefore, until we have more clarity, I’d be hesitant to commit new capital to DIS stock.
The Bottom Line on Disney Stock
Do viewers come for the content, or rather for the platform? It’s likely a little of both, but if I had to choose, I’d go for content. With Disney+ as well as Hulu and ESPN, the media giant offers both rich content and a trio of platforms, adding to the strength of the franchise. With such a powerful IP, Disney controls a good deal of its own destiny.
Price momentum of late has also been on the side of Disney stock. On an anecdotal note, it is now one of the most popular stocks among retail investors at Robinhood brokerage.
Yet, when a company reaches such a strong success level, it does not take much bad news to start selling the stock, at least in the short-run.
Therefore, I’d like to see the numbers from Disney’s various segments as well as a balance sheet to form a better opinion for the year ahead.
If you are already a Disney shareholder, it may be time to take some profits. Alternatively, you may want to hedge your long stock position with a covered call or put spread that expires on Feb. 21. That expiration date would give you enough time to evaluate Disney’s upcoming earnings.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.