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Buy Disney Ahead Of Its Next Wave Of Growth

Apr. 03, 2018 9:33 AM ETThe Walt Disney Company (DIS)44 Comments
Ziyaad Manie, CFA profile picture
Ziyaad Manie, CFA


  • Disney's structural issues are well publicized and already factored into the share price, which is trading at a mere ~14x consensus FY18 earnings.
  • However, the company has a superb content library to lay the foundation for a successful launch of its direct-to-consumer video streaming services.
  • I expect growth in Theme Parks & Resorts, Studio Entertainment, and ultimately, video streaming to counteract the decline in its Media Networks and Consumer Products & Interactive Media segments.
  • Even a moderate uptake of Disney's streaming services should enable Disney to materially outperform the market from its currently depressed levels and would, therefore, recommend Disney as a buy.


Disney (NYSE:DIS) reported conspicuous declines in three out of its four business segments in its 2017 reporting period, leading to a stagnation in the share price of the business. Whilst the rest of the market boomed in 2017, Disney flatlined. The market remains extremely skeptical regarding the company's ability to counteract its various structural issues (notably cord cutting and the impact on ESPN), detailed succinctly in this article.

Whilst I do not doubt that the old Media Networks and Consumer Products & Interactive Media segments will continue to struggle and put a drag on Disney's overall growth due to negative structural trends, the notion that profits generated from these businesses will completely fall off a cliff in the near term is greatly exaggerated, in my opinion. Further, the share price of the business is now adequately reflective of these concerns, with Disney currently trading at a FY18 PE ratio of ~14x or an earnings yield in excess of ~7%, which is a substantial discount to the overall market.

Figure 1:

Source: YCharts

Investment Thesis

A number of factors are in favor of Disney's business going forward. The most material factors, which will benefit Disney, include the following:

  1. Additional profit and free cash flow generation from the Tax Cuts and Jobs Act 2017
  2. A resurgence in Studio Entertainment revenue and profits due to multiple successful film launches (Star Wars episode 8, Black Panther, and Avengers: Infinity War)
  3. Management is also expecting sustained growth in Theme Parks and Resorts.

Most analysts seemingly account for these positive trends in their FY18 forecasts for the business, with revenue expected to increase c. $3bn or 6% in FY18, to over $58bn. Further, 24 out of 27 analysts rate Disney as a buy or hold, with only 3 sell recommendations, and a median target share price of $123, which represents ~25% upside

This article was written by

Ziyaad Manie, CFA profile picture
Work in investment banking in a developing market economy. Invest long-only in a mix of ETFs, properties and fixed income with only high conviction stock picks to provide a tailwind to core portfolio.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIS over the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (44)

Basit Saliu profile picture
post-Fox deal it will be Walt Disney Motion Pictures, Music & Theatrical; Disney D-T-C & International (incl. Media Networks); Parks, Experiences, and Consumer Products. I love that three big structure. And they can sell controlling stake in ABC to Hearst in exchange for full ownership of A&E then buy Spotify. Long Live The Walt Disney Company!
Basit Saliu profile picture
Excellent Article Ziyaad. Long Live The Walt Disney Company!
Great article Ziyaad
Veritas1010 profile picture
How about a short verse, under $100 dollars Disney is a great long term buy!
The bottom line is DIS is undervalued. Once their streaming service is up and running, I believe investors will take notice, and the stock price will rise accordingly.
Jim Freebird profile picture
Netflix is the company that has nothing to its name but huge overhead bills and a debt cycle with no alternate industries and no owned properties whose bad business model is like trying to spoon water out of a sinking ship!! Disney is approaching anything it does as the commander of their own destiny in a digital market that currently lacks any mainstream world wide pull and has not shown itself to be some take over market. Big whoop if Netflix has 100 million world-wide subscribers making absolutely no money while Disney has 230 world-wide Espn Cable subscribers alone and 300 million Disney channel cable subscribers who if and when they would ever transition are not going to go to Netflix to see "orange is the new black" and "house of cards" two names the majority of the public could care less about and has no interest in gluing themselves to some computer to watch .....LOL!! The so called biggest streamer is just scrambling around making shows draining the very economic life out of them for a niche in the red market that has not moved the needle in profitability or consumer excitement levels from the mainstream, everyday public. This is comparable to some ship steward constantly seeking a direction of financial viability making there petty salary which is barely feasible into something braggart worthy???? You can't survive or approach unknown lower revenue markets without the likes of giant take on industries that Disney has and the financial strength and infrastructure Disney Has!! The facts are clear and I explained them above, trying to muddy the waters with all this hearsay stuff for a Company like Netflix whose business model has got them treading water is futile. With major competition breathing down their neck in what is still a niche market making the so called top company no money and without any other major owned industries or intellectual properties to generate revenue and profit, claiming superiority makes no Sense/Cents and would have any accountant worried in tatters or trying to cook the books!!
Jim Freebird profile picture
Disney has no flies on them and is continually working with tradition and cunning to bring the best possible profits to the company and its shareholders and the best entertainment experience to the general public! A company earning 9 billion clear, all-time record high numbers in a year they put out just 7 pictures and had weeks of hurricanes affecting Florida, the Caribbean and Texas and fires and earthquakes affecting California and Mexico is showing nothing but how Robust and A World-Wide player it is!! They put out Block-Buster after Block-Buster Films, make Top Notch Acquisition after Acquisition, have Long-Term invested in all their successful, award winning Parks with New, Exciting grand-openings upon us, Have gone full bore into cutting edge innovations with Digital phones and Streaming(Espn is far and away the most hit up website from digital devices the world over), Own a Wide-Swath of Diverse Television Networks and will add Nat-Geo and FX to that lot, are a huge World-wide player and growing fast in some of the worlds most populous countries, China, India, Indonesia, Brazil, Mexico and Russia and are the number one licensor in the world currently owning 50 percent of all licenses in Hi-Tech China! They are more than prepared to take on Digital streaming a market currently making no money for Netflix who has a fringe following with a Bad Business model of high debt and overhead!! With their heralded production studios and Intellectual movie and Tv property to be added to The Illustrious Fox Studio production television and movie Assets the WORLD is literally at their feet!!
redarrow5150 profile picture
Websites hits and paying for streaming on ESPN or two different things. Funny here we are in 2018 and your glorious praise and worship and this company still doesn't have a streaming service available for the best content until next year. For a company with it's content like Disney not having service available for streaming is like Car Dealership opening with no cars on the lot. Disney has some of the best content that's not the issue but the streaming service.
I'm long with covered calls (Jan 115s) and hoping to buy the calls back at 10 to 20 cents to the dollar by this summer.
redarrow5150 profile picture
The streaming business is going to take longer and more dollars than many expect. Disney's track record of buying tech that is non content related is horrendous. They are miles behind the streaming game and even then they have chosen the wrong path of fragmenting their properties in too many areas. The strategy is poor and convoluted.
Jim Freebird profile picture
RedArrow lets tell people that you sold your assets in Disney before the Fox deal and have been on Seeking Alpha ever since pushing the same negative agenda!! Disney is nothing but Hi-tech.....their parks have been bastions of the most hi-tech, cutting edge innovations for decades and soon will have robots throughout many of them, The Marvel cinematic universe, Star Wars and Pixar put out nothing but trail-blazing computer enhanced graphics, Espn is the number one most visited site on Smartphones and I-phones, They Have a Successful Park in China whose whole vast country will be linked with Hi-Speed trains in Two years!! And as far as spending and losing money like an uncapped oil well, Netflix is that company with it's runaway overhead and debt to finance a niche market that has no streaming company in the black, just scrambling to keep a losing business model of no owned assets and fall back industries afloat!! This misinformation and false narrative has permeated Disney for the last three years!! It's Netflix that will make less this year than Disney will make on Just their first film this Year Black Panther and will Pay Disney in as much Residuals for their Marvel assets(Disney has the top three shows on the Network) and others than they will make as an entire company this year!! This should tell you how lop-sided and completely farcical It is to compare companies!! Those Fee's Netflix pays will only increase in the years to come both for any Disney and Fox assets or will be pulled all-together, either way they are further marginalized in the debt cycle or as a Niche non-mainstream provider which affects their already putrid bottom-line!!
redarrow5150 profile picture
So what if I sold? As usual you go off on a rant which includes putting on your cheerleading outfit with pom poms. Like I said if it isn't content related Disney's track record of tech is horrendous. I have no negative agenda but pointing out facts of why this stock has lagged for nearly three years. You on the other hand continue to bash me personally because I find several issues with the stock. Why don't you take a deep breath and actually learn why Disney execution hasn't move the needle on the price.
Jim Freebird profile picture
The only thing horrendous is a person to keep coming back on a board to bash a stock who sold at a much lower price than its high so that he will not see it go up beyond where he sold and lose out. You have an agenda and its obvious, no one does that, if they cut ties they are thankful for what they got out of it and don't come back to keep pitching what was always an overblown, fact-less based scenario in sour grapes in an attempt to hurt others stakes!! That is a real selfish thing to do!! Really now grow up and start seeing the light of what life is about. Stop the whining, you are out, you are out, either move on and be thankful or get back in and add to a position that is way over due to increase!! This other stuff has no constructive basis for accomplishing anything.
Once the streaming service starts every family in the world with young children will subscribe. Kids can watch Disney movies a hundred times over...I know.... I can still remember every freaking' word of every song in some of them...thanks to my kids.....!!!!!!
Especially if DVDs are the only alternative
Alfred Einstein profile picture
Disney’s problem right now is just sentiment. All it’s going to take to get this stock going again is a shift in that sentiment, but that is notoriously tricky to try and predict. It could be the conclusion of the TWX merger or a high profile value investor getting in (Buffett or Cooperman or someone like that). I can’t imagine there are too many professional money managers looking to sell shares down here, so it could also just be that there becomes a lack of shares available for sale. Regardless of what the cause is, it will eventually get some momentum again.

It’s hard to find really high quality companies trading at a compelling value these days, but Disney definitely fits that bill, anything under $100 is bargain as far as I’m concerned.
I just started following DIS recently and have been surprised by it's price and movements. You would think Black Panther, ESPN streaming, etc would do something, but crickets. Looking to buy in but doesn't seem to be a hurry
Look at ATT same thing like watching paint dry
But at least T pays a 5%+ dividend. DIS has done nothing for the last 3 years but go between high $90s and $105-$108-ish and back again.
Ziyaad Manie, CFA profile picture
Perhaps I am contrarian, but all I really care about is fundamentals, strategy and growth prospects, which are mostly positive for this business. Historical share price movements don't matter as Disney is making material changes to its strategy to address the lack of growth.

It has some "legacy" assets that will slowly dwindle but still generate cash to support other ventures, some solid, growing businesses and then high quality content that has the potential to be monetised far more meaningfully in a Netflix-like model. All these added together with the current trading price make it a compelling buy going forward from today.
Basti1993 profile picture
I got my finger on the buy button, only waiting for my salary.
Don’t get me wrong I like the stock .. but I’d like to see some kind of break out before I buy .. it’s done zero the past year while the market overall has skyrocketed..
buy under 101
Great company lousy stock.. too many other good ideas out there .. maybe buy it put it in your 401K and forget about it
Basti1993 profile picture
What are your good ideas? Share your wisdom.
You can say what you want but Disney has to invest al loz the next years. Theme parks are old, ESPN has declining revenue and, they need to integrate 202 and build there own streaming business. All of that will cost a lot of money the next years a wall street will hate that. Nothing for quick sucess and probably even as private investor you might get this one cheaper later.
Bought a few more shares this morning. Largest holding for me
Sorry to say Disneyl is headed towards $80 s . A lot of building going on in La. than boom $120s this summer
Basit Saliu profile picture
Disney is a must buy. Great Article Ziyaad.
I hope fetching DIS before the next mayor upside move. Getting this interesting growth value on the actual levels is a bargain...
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