Forget the Disney Stock Bears
Walt Disney Co. (NYSE:DIS) may have launched one of its most successful animated theatrical releases in its history. Zootopia has hit the top of the world’s movie charts, dethroning the previous king—The Lion King that is—that held the honor from its release until now. Zootopia earned nearly $74.0 million in the U.S. and $232 million worldwide. Yet DIS stock is stagnating around the $95.00–$96.00 mark without any major moves up or down.
Zootopia’s success suggests that Walt Disney has reclaimed “its Waking Sleeping Beauty-era glow… We are now at the point where a Walt Disney feature is as likely to be great and/or successful as a Pixar movie,” as Forbes puts it. (Source: “Weekend Box Office: ‘Zootopia’ Nabs Record-Breaking $73M US Debut For $232M Worldwide Total,” Forbes, March 6, 2016.)
Zootopia’s popularity at the box office comes on the heels of the company’s other box office release hit—that little film called Star Wars Episode VII: The Force Awakens. It was indeed right here on Earth that Disney earned some $2.9 billion in the last quarter (which ended January 2, 2016).
Yet, the Force is still sleeping where DIS stock is concerned—and rather a pleasant slumber it must be. The successful quarter was the 10th straight quarter of double-digit earnings-per-share (EPS) growth.
Those who “know” such things said that Disney lost three million subscribers on ESPN, though. (Source: “ESPN Viewer Losses Add to Angst for Disney’s Big Profit Engine,” Bloomberg, November 27, 2015; http://www.bloomberg.com/news/articles/2015-11-27/espn-viewer-losses-add-to-angst-for-disney-s-big-profit-engine.) When it comes to ESPN, Disney has some tough choices to make, as many viewers are switching from Cable to Internet/streaming entertainment. Luckily, Disney has already planned for such contingencies. The company has negotiated with Apple Inc. and Amazon.com, Inc. to offer ESPN is a bundle of channels through online streaming services, but at a fixed price. (Source: “ESPN in Discussions to Get on Other Streaming Services (Video),” Re/Code, February 17, 2016; http://recode.net/2016/02/17/espn-in-discussions-to-get-on-other-streaming-services/.)
Despite the ESPN issue and the way analysts and investors have reacted, Disney understands that the future of entertainment is in other media. Sooner rather than later, distributors like Netflix, Amazon Prime, Apple, and others will be approaching the content creators for offerings.
Indeed, despite the ESPN issue, Disney’s posted 32% net income.
One reasonable voice stands out from the rather obsessive-compulsive sports “fans” harping on about Disney’s ESPN figures. Disney gives them Zootopia and they reply with myopia. Omar Sheikh from Credit Suisse has called out the pessimists. He says clearly that the ESPN concerns are much ado about nothing. Sheikh understands the principle of a car’s independent suspension, or a jelly for that matter.
Sheikh kept an “Outperform” rating for Walt Disney Co and a target price of $130.00. That’s well over 30% upside from the present value.
Simply put, lower numbers from ESPN are balanced by Walt Disney’s strength in other revenue segments, not to mention its defensive strategies with the streaming services. (Source: “Disney Investors: Stop Worrying About ESPN,” Benzinga, March 3, 2016.)
The next quarter will likely see Disney more directly addressing ESPN concerns with related solutions. The results will also highlight the records now set with Zootopia. Investors may want to consider being among those who held DIS stock while it was priced so low, because they may well see 30% returns.