1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Robert Stephens, CFA
Robert Stephens, CFA
Articles (139) 

Why Disney's Stock Price May Surge After Underperforming the S&P 500

The company’s acquisition of Fox and its move into streaming services could act as catalysts over the long term

August 17, 2018 | About:

Fiscal third quarter results from Walt Disney on Aug. 7 showed a rise in revenue of 7% to $15.2 billion versus the same period of the previous year. This was slightly below the market consensus forecast of $15.5 billion. The company’s adjusted earnings per share increased by 18% to $1.87. This was behind analyst expectations of $1.95.

Its financial performance was boosted by strength in its studio entertainment and parks and resorts segments. The studio entertainment segment recorded revenue growth of 20%, with parks and resorts delivering sales growth of 6% versus the same quarter of the previous year. Revenue from the consumer products segment, though, declined by 8% due in part to falling sales for toys from the Spiderman and Cars franchises.

Acquisition potential

Since the company’s third quarter results were released its stock price has fallen by 3.5%. This has reduced its gain in the last year to 11%, which is behind the S&P 500’s 17% rise during the same time period.

2038058917.png

The proposed acquisition of Fox could be a major catalyst on Disney’s financial and stock price performance over the long run. The deal will provide the company with an enlarged portfolio of brands, including National Geographic, as well as a number of movie franchises such as Avatar. The company has plans to further invest in them in order to boost its direct-to-consumer plans. Fox’s 350 channels reach consumers in over 170 countries, and have the potential to provide the business with a platform for growth.

Disney has the capacity to make the Fox acquisition work. It has a track record of buying successful franchises and expanding them, with its consumer licensing, theme parks and streaming service having the potential to extract the maximum value from Fox’s brands and franchises. Therefore, while the acquisition is risky due in part to its size, the chances of it working out in the long run appear to be relatively high.

Evolving business

The planned launch of Disney’s streaming service in 2019 has the potential to boost its sales and profit growth rates in future years. Streaming services have become increasingly popular in recent years, with more than half of U.S. homes subscribing to at least one service. This trend may continue over the medium term, with the prospect of further global growth in this space.

While the streaming services industry is highly competitive, Disney has the capacity to be successful in this area. It has a number of strong brands that could differentiate its service from rivals. It has also hinted at occupying a lower price point than rivals such as Netflix, in order to reflect what may be a focus on quality over quantity.

Although there is a consensus view that ultimately one streaming service will become dominant, the company could occupy a strong position in an oligopolistic market structure. With U.S. households subscribing to three streaming services each on average, there could be room for the company’s brand portfolio to provide it with high growth in the lucrative streaming services space.

Challenging outlook

Disney’s third quarter results showed a continued fall in cable subscribers. Consumers continue to switch from cable to online services, which has the potential to put further pressure on the company’s advertising revenue. The decline in cable subscribers in the third quarter follows declines in previous quarters. This trend could continue over the medium term, with the popularity of new technology likely to act as a drag on the company’s cable revenue stream.

The company, though, is seeing a moderation in the decline in cable subscribers. The rate of decline in subscriber numbers has moved lower in each of the last four quarters, and the company remains optimistic that its subscriber numbers will stabilize over the medium term. The availability of smaller, lower-cost cable packages has helped to arrest the rate of decline. With the company’s streaming services set to be a major growth avenue over the coming years, it may be able to offset declining demand for cable services.

Verdict

The acquisition of Fox could prove to be a major catalyst on Disney's stock price. It has the potential to create a stronger business which is well-placed to move ahead with its plans for a streaming service in 2019. This could provide additional growth opportunities that help it to overcome what may prove to be continued declines in demand for cable services.

Although the company’s stock price has underperformed the S&P 500 in the last year, it seems to offer investment potential for the long run.


Rating: 5.0/5 (1 vote)

Voters:

Comments

Please leave your comment:


Performances of the stocks mentioned by Robert Stephens, CFA


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK