Walt Disney Co (NYSE:DIS) faces turmoil in its television and movie divisions. DIS continues to enjoy success with its theme parks and other offerings that are explicitly Disney-branded; however, the decline of cable TV viewership, as well as production delays in its Lucasfilm division, create uncertainty with much of the company. Given this skepticism, investors should avoid DIS stock until a greater measure of certainty returns.
Founded in 1923 by animator Walter E. Disney and his brother Roy O. Disney. The Burbank, California-based company that created Mickey Mouse would grow from a Hollywood production studio. It later diversified into movie and television productions, theme parks and consumer products.
Today, Walt Disney is now the second-largest media conglomerate, after Comcast Corporation (NASDAQ:CMCSA).
Walt Disney recently completed construction and opened its theme park in Shanghai, China to great success. However, the actions of other divisions involving both movie production and television have come under fire.
DIS Stock: Causes for Uncertainty
Walt Disney’s immediate challenge hinges on whether earnings growth can continue; however, uncertainty regarding cable TV, streaming and Lucasfilm has called into question whether that growth can continue.
For example, the brand has faced turmoil in its Lucasfilm division with news that the release of Star Wars: Episode IX has been delayed. DIS terminated its relationship with Episode IX’s slated director, Colin Trevorrow due to “creative differences.” As a result, the release of Episode IX was pushed back from May to December 2019.
Turnover in the Lucasfilm division has had a detrimental effect on release dates, and by extension, DIS stock. With the turnover and uncertain release dates, the flow of creative content at Disney has been disrupted, and this could be particularly problematic with the company’s upcoming streaming service.
Declines in cable TV viewership have placed downward pressure on the company’s revenues and, ultimately, DIS stock. Viewership of ESPN and the Disney channel have followed this negative trend. Cable TV accounted for 30% of revenues and 43% of profits in 2016. Additionally, entities such as the NFL have demanded higher payouts for the right to broadcast their creative content.
This uncertainty does not appear to be reflected in the stock price. Disney stock and its financial metrics closely resemble S&P 500 averages. The price-to-earnings ratio stands at about 17, revenue grew at just over 6% over the last five years and its dividend yield is around 1.6%. Also, earnings growth is estimated to come in at $5.80 per share for fiscal 2017, representing growth of just over 1% from its 2016 earnings of $5.73 per share.
Disney Responds With Streaming Service
One of the core reasons DIS stock has faced profit growth issues is “cord-cutting,” where people are continually abandoning traditional cable for streaming services. In reaction to this, the company has decided to start its own streaming service and with a separate ESPN streaming service, and it will pull its programming from Netflix, Inc. (NASDAQ:NFLX).
Most analysts praised Disney’s move into streaming, as the Disney portfolio contains iconic brands such as Mickey Mouse and several animated classics such as Cinderella and The Lion King. The Star Wars brand has also proven valuable. Its $4 billion acquisition of Lucasfilm has already turned a profit. Considering all of the above, Disney’s portfolio could easily support a streaming service and serve as a replacement for the Disney channel as cable TV declines.
The ESPN streaming service will also likely compensate for the loss of cable viewers. However, it will not include live NFL and NBA games that are a draw for sports fans. Those games will only be available on ESPN’s cable offerings. Keeping NFL and NBA games on cable might be necessary, as the cost of sports rights from these organizations continue to increase.
Bottom Line on Disney Stock
Given the uncertainty with several its divisions, avoiding DIS stock appears to be a wise near-term action. Most of its Disney-branded offerings, especially the theme parks, still enjoy enough success to keep the company afloat. However, given the uncertainty of the transition from cable TV to streaming and the turmoil at Lucasfilm, investors should remain cautious.
That said, most stocks hinge on valuation. If the P/E falls near or into the single digits, or if strategic moves with its television offerings pay off, investors should seriously consider acquiring a position in DIS stock.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.
