Walt Disney Co (NYSE:DIS): DIS Stock Faces Growth Issues

DIS StockWalt Disney Co Is Not the Happiest Place Now

When Walt Disney Co (NYSE:DIS) acquired ABC and ESPN for a whopping $19.5 billion in 1995, the thinking was that the merger would create a powerhouse media company encompassing entertainment, news, and sports.

If you ask Walt Disney Co CEO Robert A. Iger about the deal now, he would probably say it was the correct move. This wouldn’t be unexpected, given that Iger was the president of ABC at the time of the acquisition by then-Walt Disney Co CEO Michael Eisner.

DIS stock languished on the chart in a sideways channel from the time of the acquisition to around 2012, before finally breaking out at $40.00 in 2012. Walt Disney Co stock subsequently surged to $122.00 in August 2015 prior to relapsing to below $100.00. DIS stock made a second move back towards the high, prior to declining to $86.25 on February 10, 2016 before rallying to the 52-week high of $109.49 on January 11, 2017.

Walt Disney Co stock is underperforming the S&P 500 with a 7.9% move over the last 52 weeks compared to 17.4% for the index.

dis

 

Chart courtesy of StockCharts.com

The problem facing Walt Disney Co is widely acknowledged as being the ESPN unit and its declining subscriber base. Whether this is a temporary situation is unknown but, for now, the ESPN unit is offsetting strong results at the company’s theme parks, including impressive crowds at the newly opened Shanghai Disney.

Pivotal Research is so bearish on DIS stock that it moved the stock to a “sell” rating and axed its target price to $86.00, which corresponds with the February 2016 low and implies a 19.6% decline from current levels.

Now, while I believe that Walt Disney Co needs to fix the ESPN business, it’s a structural issue, and the rest of the company, specifically the Disney and movie business, looks pretty good. The crowds continue to invade the theme parks, despite the company jacking up the entrance fees to levels that are out of reach for many visitors.

The movie unit looks encouraging, with the Star Wars franchise and the strategic purchase of Marvel, which has resulted in some pretty decent-grossing superhero movies.

DIS Metrics Show Some Troubling Signs

A look at the financials shows steady revenue growth, albeit the growth rate has ranged from around six percent to 8.4% over the past three fiscal years. The concern is that Walt Disney Co is only expected to ramp up revenues by 3.50% and 5.80% for FY17 and FY18, respectively, which is below the recent growth rates. (Source: “The Walt Disney Company (DIS),” Yahoo! Finance, last accessed January 12, 2017.)

Given the slower projected growth, Walt Disney Co will need to find a remedy. The company is already making changes at ESPN, including big layoffs. This is a bandage solution that will need to be dealt with in deeper detail should the subscriber base continue to falter.

We all heard about Walt Disney Co perhaps taking a run at Twitter Inc (NYSE:TWTR), but this doesn’t make a whole lot of sense, given that Twitter is also struggling to add users. While Twitter would offer up another avenue to market Walt Disney Co products, paying the expected $15.0-billion price tag would be a stretch given the company already has about $15.6 billion in net debt on its balance sheet.

My view is Walt Disney Co must first deal with its ESPN unit before jumping into another potential hot spot.