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Harsh Jain
Harsh Jain
Articles (219) 

Should You Sell Disney?

The media giant posted strong earnings for the 1st quarter

February 08, 2018 | About:

2017 was a disappointing year for Walt Disney Co.’s (NYSE:DIS) shareholders as the stock underperformed the market. In addition, the stock is also down approximately 9% year to date.

The media and entertainment giant is hoping to turn things around, however. 

Disney reported strong first-quarter results on Tuesday, which sent shares higher in after-hours trading. For the quarter, the "House of Mouse" posted earnings per share of $1.89, beating the census estimate by a wide margin of 28 cents. That figure represents a surge of 22% year over year. Including a one-time benefit due to the new tax law, earnings grew 88% on a GAAP basis.

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Quarterly revenue grew 4% year over year to $15.35 billion, but missed the consensus by $100 million. The primary reason for the miss was flat performance across its business segments, excluding parks and resorts.

The revenue generated from the company’s parks and resorts business increased 13% and operating income grew 21%, more than offsetting declines in the other divisions.

The company also announced it is preparing to launch ESPN Plus, its first direct-to-consumer streaming service, which will cost $4.99 per month.

According to Chairman and CEO Robert Iger, the service will offer "an array of live programming that is not available -live sports, live sports events - on current channels."

The service cannot come soon enough as the company's once profitable media business continues to dent Disney's bottom line. ESPN's number of cable subscribers and advertising revenue both declined in the most recent quarter. 

Disney is also in the process of acquiring parts of Twenty-First Century Fox (NASDAQ:FOX)(NASDAQ:FOXA) for $66.1 billion. Although the deal is appealing, it may not be successful as it must pass federal antitrust laws. 

If the deal is successful, Fox would help Disney deliver more content, improve its direct-to-consumer initiatives and diversify the business geographically. The company's assets would also expand Disney’s content portfolio, enabling it to effectively compete against its peers. Disney would also benefit from Fox’s 30% stake in Hulu.

Summing up

Regardless of its issues, I believe Disney is still a great long-term investment considering the company is aggressively trying to overcome problems related to its ESPN platform.

While the "House of Mouse" is still facing several headwinds, the growth in its parks business and aggressive execution of its direct-to-consumer strategies look promising.

On the other hand, Disney currently trades at a forward price-earnings (P/E) ratio of 15.5, making it undervalued. As a result, shareholders should continue holding the stock as Disney’s ongoing efforts will certainly bear fruit in the coming years.

Disclosure: No positions in the stocks mentioned in this article.


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