Macquarie Is Wrong on Disney Stock
The Walt Disney Company (NYSE:DIS) has received some undeserving downgrades that have decimated DIS stock in recent days. However, Disney stock offers more value than the bears see.
To begin with, take note that the biggest culprit behind the stock’s recent fall is a Macquarie downgrade that has come on the heels of Disney’s biggest success this year. For some reason, Macquarie fails to see that Disney’s Star Wars Episode VII: The Force Awakens is on a record-breaking spree that is continuing to add value to this dividend aristocrat.
One Macquarie analyst cited Star Wars to be an old story that’s already baked into the stock price. On the contrary, he sees cord-cutting by online streaming services like Netflix, Inc. and Amazon.com, Inc.’s “Amazon Prime” to be a lingering concern for Disney’s ESPN.
The absurdity of the Macquarie downgrade becomes obvious when you see the alternative recommendations they offer over Disney—CBS Corp. and Time Warner Cable, which, having the same cable TV model, should also be facing the cord-cutting threats.
I’ve maintained this before; the cord-cutting fears related to the slip in ESPN’s subscriber numbers are blown far out of proportion.
None of the online on-demand TV streamers offer anything that’s remotely close to ESPN. ESPN is, hands down, the top pick among sports fans for live sports. Consider this in addition to the fact that the three million Disney lost from its humongous 95 million subscribers, although a big number on stand-alone basis, is still only a drop in the proverbial ocean.
Nonetheless, Bob Iger has also already hinted at a move towards offering a subscription-based, Netflix-like online streaming service for ESPN subscribers, which will make ESPN independent of the pay-TV bundles that face a threat from streaming services. In fact, ESPN’s mobile app has recently started offering similar live streaming.
Disney Stock: Great Buy-and-Hold Dividend Aristocrat
Even if we were to say that the Star Wars factor is already priced in, there are still a number of reasons why DIS stock might have more upside.
Disney has a very peculiar revenue mix. While many compare it with other cable TV companies, the right way to describe it would be as an entertainment company. This is because, while the biggest chunk of its revenue does come from the media network business, when you sum up the revenue from all of its remaining business segments including parks and resorts, studios, consumer products, and interactive, the total surpasses the cable TV revenue.
This is why it becomes imperative for analysts to avoid narrowing down the focus on ESPN alone, one of its many media networks, and instead see the business as a whole.
Disney makes double the profits than Macquarie’s suggested CBS and Time Warner Cable, combined, and has over a decade long history of consistent dividend payouts that have only increased over the years.
The yield has also increased since the stock price fell and stands at a healthy 1.35% now. Meanwhile, the stock has gained a solid 152% in the last five years, and over five percent in the last year alone.
The Bottom Line for DIS Stock
The Force Awakens has now become the biggest movie of all time, not only in the U.S., but also worldwide. The franchise has also done record-breaking business in China, where it has recently opened and is on its way to recoup the $4.0 billion Disney spent on the production company behind it, Lucasfilm.
While the market is fixated on The Force Awakens, there are quite a bunch of other expected blockbusters set to be released in the next three years by Disney, including more in the Star War series and sequels to Frozen, Captain America, Pirates of the Caribbean, Iron Man, and Ant Man, to name a few. Clearly, Lucasfilm is not the only profitable acquisition of the company. Marvel and Pixar remain the other two promising acquisitions that will continue to add millions to the company in the coming years.
Looking past the downgrades, I strongly believe Disney stock has gained some strong ground to make a northward run after having tanked a good 19% from its 52-week high.
The bottom line: I see promising upside for DIS stock in 2016.