Disney: Opportunity On The Sell-Off

Summary

• DIS stock is down 7% over the past month.
• The valuation is nearing a cyclical low.
• ESPN concerns are greatly exaggerated, as enhanced OTT distribution later this year will help turn this business unit around.
• We are buyers of DIS stock at these levels.

While the broader markets have roared higher, Disney (NYSE:DIS) stock has been left out of the party. Over the past 3 months, the S&P 500 is more than 4% higher, while DIS stock is down about 7%. We have been bullish on DIS stock for multiple reasons, including significant forthcoming studio tailwinds, new theme park additions, and enhanced OTT distribution of ESPN and other Disney-owned content. As such, we believe this dip is a good buying opportunity.

DIS data by YCharts

DIS stock has all the features we like about a potential "buy the dip" stock. Firstly, the valuation is cyclical. The stock's P/E multiple has cycled between ~16x and ~25x over the past 5 years. Secondly, the current valuation (18.3x trailing earnings) is a relative trough in that cycle. As can be seen in the chart below, such valuation troughs have historically been good buying opportunities with big near-term upside.

DIS data by YCharts

Thirdly, the fundamental growth story at DIS remains in-tact and the company appears positioned to sustain strong top and bottom line growth over the next several years.

Disney is dominating in Hollywood. We have noted for some time that Disney appears to be the only studio consistently producing good movies, and this trend has only continued. Disney pulled in $1.8 billion in studio EBITDA last year versus about $1 billion for the rest of the industry combined. In Beauty & The Beast and Guardians of the Galaxy Vol. 2, Disney has the two highest grossing movies so far this year.

For Disney, quality studio content is much more than just quality studio content. Owning quality studio content has collateral benefits in the company's other operating segments, like theme park attendance and sales of consumer goods. New and forthcoming additions to Disney's theme parks, including Star Wars Land and Avatar Land, underscore just how many levers Disney can pull to bring dollars in the door thanks to its rich content portfolio.

Most importantly, concerns related to cord-cutting and lower cable viewership, especially at ESPN, are greatly exaggerated. Disney owns a ton of really good content that people want to see, and all the company needs to do is figure out the optimal way to deliver that content to the consumers that want to see it.

The company is already well on its way to doing this. ESPN content is already featured on over-the-top services like Sling TV, Hulu, PlayStation Vue, DIRECTV and YouTube TV. From a per sub pricing standpoint, these OTT services are just as valuable to the company as traditional platforms, so Disney isn't taking any pricing hits in this OTT transition. Moreover, the company is leveraging its ownership stake in BAMTech to launch a new ESPN-branded OTT service later this year.

All in all, DIS stock looks like a growth stock on sale here due to over-exaggerated concerns around the company's ESPN business. We are buyers here and lower, all else equal.

Analyst’s Disclosure: I am/we are long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.