After disappointing shareholders in 2016, Walt Disney Co. (DIS, Financial) was off to a decent start heading into 2017. The stock, though, plunged more than 5% in the last month and is up just 2% year to date.
As a matter of fact, Disney has expensively upgraded its technology in recent years. The media giant’s ESPN platform now offers live sporting events, game highlights, continuous sports news and conversations about sports. The ESPN platform still produces an estimated $4 billion in cash for Disney every year, more than two-fifths of the company’s profits.
On the dark side, the ESPN platform continues losing subscribers at a strong rate. The sports network has lost more than 12 million subscribers from a peak of 100 million in 2011. ESPN, though, is not the only one facing severe problems. Viewers are increasingly abandoning expensive cable packages for streaming service offered by Amazon (AMZN, Financial) and Netflix (NFLX, Financial).
It is true that Disney has been struggling throughout the past few quarters due to the cord-cutting trend that has taken a toll on its hugely profitable ESPN platform, but the media giant is putting in a lot of effort to adapt to the changing conditions in the cable TV industry. The company plans to integrate several new features in the Watch ESPN app in the future considering the growing use of smartphones.
Apart from its Media Networks division, all other divisions, especially Studio Entertainment, carries on growing at a strong pace. Moving onward, the media giant is well positioned for the second half of this year. Disney’s “Beauty and the Beast,” the first movie of 2017, performed much better than expectations and crossed the $1 billion mark at the worldwide box office.
The second installment of the "Guardians of the Galaxy" franchise, released on April 19, also performed very well in the first two weekends and could soon reach $1 billion worldwide. Moreover, the media giant also recently released its fifth installment of the "Pirates of the Caribbean" franchise that sailed over the $500 million mark globally after just under two weeks of worldwide release.
Also, Disney is on its way to launching several other significant titles including “Spider-Man: Homecoming,” “Thor: Ragnarok” and “Star Wars: The Last Jedi” in the next half of this year. The releases of these movies will probably boost the operating income as well as the sales of its merchandise.
On the other hand, the company’s parks and resorts division continues to display strong signs of growth. In 2016, the revenue generated from the parks and resorts business accounted for 30% of the company’s overall revenue. It is highly likely that Disney’s parks and resorts business will display strong signs of growth this year as well, bearing in mind the opening of its new theme park in Shanghai.
Summing up
Although Disney’s Media Networks division is facing several growth-related issues, the company’s other divisions are growing at a healthy rate. Disney’s ESPN platform is not a stunning business anymore which is negatively affecting its share price. That does not mean the growth is over for the media giant as it is trying hard to reshape itself to keep up with the changing trend of the cable TV industry.
On the other hand, Disney also has substantial free cash flow (FCF) which will allow it to invest efficiently in the forthcoming years. It will enable the company not only to buy back the shares but pay its dividends as well. The stock trades at a healthy price-earnings (P/E) ratio of nearly 18, suggesting it still has legs to run.
As an outcome, shareholders should consider adding Disney to their portfolios as it is down almost 8% from its 52-week high.
Disclosure: No position in the stocks mentioned in this article.
