Here’s Why the Bears Are Wrong on Disney Stock
Walt Disney Co (NYSE:DIS) stock bears never felt so good. With Disney stock slipping 6.5% in the past two weeks and nearly 10% in the past 12 months, the bears seem to have a point.
But if you take that point and decide to turn bearish too, you could be missing out on a huge opportunity.
Let me explain…
“Cord cutting” is a key argument from Disney stock bears. They say that Disney’s ESPN is doomed going forward. As consumers shift from network TV to on-demand streaming, cable companies could lose some viewers. But for Disney’s ESPN segment, these concerns might be exaggerated.
You see, ESPN is not your average sports network. It owns the broadcasting rights to some of the most-watched sports events in the U.S., including Monday Night Football. Its popular content means there will always be sports fans tuning into the channel. By July 2015, ESPN was available to 92.9 million households with paid television. That’s almost 80% of all U.S. households with televisions. (Source: “List of How Many Homes Each Cable Network Is in as of July 2015,” TV By The Numbers, July 21, 2015.)
Looking at top-line numbers, Disney’s cable networks might not seem that impressive, with revenue slipping two percent year-over-year to $4.0 billion in the most recent quarter. However, when it comes to operating income, there is a pleasant surprise—operating income from Disney’s cable networks increased by 12% year-over-year to $2.0 billion. What was the main contributor to that increase? ESPN. (Source: “The Walt Disney Company Reports Second Quarter and Six Months Earnings for Fiscal 2016,” Walt Disney Co, May 10, 2016.)
The sports network successfully lowered its programming costs while also generating higher affiliate revenue. In the quarter, ESPN did experience a decline in advertising revenue, but that’s because there were fewer college football playoff games taking place in this fiscal quarter compared to the previous year. In its earnings conference call, the company said that so far into this quarter, ESPN ad sales are up five percent year-over-year. (Source: “Q2 FY 16 Earnings Conference Call Transcript,” Walt Disney Co, May 10, 2016.)
While results from ESPN turned out to be better than expected, the real star at Disney is its studio entertainment division.
In the most recent quarter, revenue from studio entertainment surged 22% year-over-year to $2.1 billion. Operating income increased by a more impressive 27% year-over-year to $542 million. But given the blockbuster movies released by Disney, success in this segment shouldn’t really come as a surprise.
In recent months, Disney had some moneymaking machines at the box office. The big catalyst for the reporting quarter was its 3D animated comedy-adventure film Zootopia, which generated $332.5 million in domestic box office and $639 million overseas. With $971.5 million in worldwide box office revenue, Zootopia is the highest grossing release of 2016 to date. (Source: “Zootopia,” Box Office Mojo, last accessed May 20, 2016.)
For the next earnings report, Disney’s studio entertainment segment could benefit from another major release—The Jungle Book. Released just over a month ago, the movie has generated a whopping $832.2 million at the box office worldwide. (Source: “The Jungle Book,” Box Office Mojo, last accessed May 20, 2016.)
And don’t forget Star Wars: The Force Awakens, which surpassed Avatar to become the highest grossing film of all time in the U.S. in just 20 days of it release. While The Force Awakens was released in December of last year, it continued to bring in box office revenue in the reporting quarter.
Note that the success of this Star Wars installment is an indication of the popularity of the franchise. This could mean more revenue from merchandising and licensing, as well as the potential of future Star Wars theme parks.
And there’s more. Disney is going to release another Start Wars movie—Rogue One: A Star Wars Story—on December 16 of this year. Judging by viewers’ responses to the last Star Wars film, Rogue One could be another box office hit for Disney.
The Bottom Line on Disney Stock
Recent filings to the Securities and Exchange Commission (SEC) showed that Disney stock had attracted the attention of one of the biggest hedge funds in the world.
Billionaire hedge fund manager Ray Dalio’s Bridgewater Associates held over 210 million shares of Disney stock as of the end of March. At that time, his stake was worth upwards of $20.0 million. (Source: “Form 13F Information Table,” U.S. Securities and Exchange Commission, May 16, 2016.)
Disney runs an amazing business. If Ray Dalio doesn’t mind the concerns from Disney stock bears, maybe you shouldn’t either.