We have maintained our long-term Neutral recommendation on The Walt Disney Company (DIS) with a target price of $68.00.
Why the Reiteration?
This Zacks Rank #3 (Hold) company continues to benefit from the strong performance of the Media Networks and Parks and Resorts division. Disney remains well positioned to drive revenue growth through its strategic initiatives. The company’s investments in its core businesses are also aimed at expanding its operating margins.
The company’s content distribution agreements with Comcast Corp (CMCSA), Netflix Inc. (NFLX), Cox Communications and Charter Communications strengthened Disney’s multichannel subscription model by adding more platforms to deliver its content.
Moreover, we believe ESPN’s strong performance is likely to boost the results of the segment as it remains the favorite destination of sports lovers and has the right mix of exclusive sporting licenses with top sporting leagues.
Disney also announced its purchase of all the distribution rights of Marvel Studios’ Iron Man, Iron Man 2, Thor, and Captain America: The First Avenger, which were previously held by Paramount Pictures owned by Viacom, Inc. (VIA). Buying these rights is a strategic fit for Disney as the company seeks to introduce renowned characters from Marvel’s universe into its theme parks and other lines of business.
However, the stock is likely to remain under pressure in the near term on account of numerous challenges that will negatively impact its financials in the upcoming quarters.
The company stated that its third-quarter results at the Parks and Resorts business will be negatively impacted by $35 million owing to the shift in timing of the Easter holiday. Further, the company’s Studio results are expected to be adversely affected by the pre-release marketing expenses for The Lone Ranger.
Moreover, the company’s Interactive business is projected to incur a loss, reflecting the shift in the release date of Infinity game to the fourth quarter. In the Broadcasting division, the company expects programming expenses to be $40 million higher in the third quarter compared with the year-ago quarter.
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