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Time to Ring the Cash Register in Disney Stock?

Dana Blankenhorn

For a slow-growth media company, Walt Disney (NYSE:DIS) is being treated like a fast-growth tech stock. Credit the market’s love of consolidation.

DIS Stock: Time to Ring the Cash Register in Disney Stock?

Source: Baron Valium via Flickr

Over the last several years, Disney has been acting like a classic “roll-up.” It has been buying other media properties and proclaiming its secret management sauce will make the whole thing tastier. Investors have been piling in.

The latest merger, with most of what had been 21st Century Fox, was completed in March. Disney is scheduled to report its first-quarter post-consolidation on Aug. 7. Analysts are expecting $1.76 per share of earnings on revenue of $21.56 billion.  The March quarter saw $1.61 per share of earnings on revenue of $14.92 billion. 

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The March quarter earnings caused little reaction from the market. But Disney stock is up almost 30% so far in 2019 on hope over-the-top delivery will crush Netflix (NASDAQ:NFLX), which itself is up slightly more than 30% in 2019.

Over the Top in DIS

Morgan Stanley (NYSE:MS) analyst Benjamin Swinburne, who predicted that Disney should be a long-term streaming winner in five years, had a one-year price target of $160 per share for the stock. Disney opened for trading Friday at about $142 per share.

The idea that investors are digesting their meal before it’s served caused Imperial Capital to downgrade Disney on June 17, while maintaining a one-year price target of $147.

Bullish analysts are ignoring that call, so confident are they that Hulu, which Disney now controls, and Disney+, which the company will launch this fall, are certain winners and that ESPN+, its initial streaming service, will dominate the sports category.

In some ways Disney remains cheap, selling at less than 16 times trailing earnings. In other ways it is frightfully expensive, selling at more than three times its anticipated 2019 revenue (even with Fox), the yield on its dividend down to 1.3%.

Tomorrow Belongs to Me?

Disney’s dominance of the movie box office is giving it enormous leverage over movie houses. Analysts are confident it can get more mileage out of such franchises as Star Wars, Marvel, and Pixar, which will soon launch its fourth Toy Story movie. But sequels seldom outperform original movies. Some of Disney’s spin-offs, like Dark Phoenix, have already bombed. 

The open question remains streaming, where Netflix has an enormous lead with 150 million subscribers worldwide, at about $11/month each. Hulu, meanwhile, has about 27 million subscribers and ESPN+ just 2 million. 

Disney is pricing its services low in order to get a fast start. ESPN+ costs just $5/month, against the $9/month ESPN services get from cable subscribers. Disney’s initial price for Disney+ is just $7 per month. The main Hulu service price was cut to $6 per month  when Netflix was pushing through its latest price hike.

In short, Disney is sacrificing short-term results for long-term market share, hoping that a two-year roll-out of Disney+ in all global markets will bring its subscriber count within reach of its smaller rival quickly. After that analysts believe its vast library, which will be denied Netflix, can let it raise prices and grow profits after 2021.

The Bottom Line on Disney Stock

Disney dominates the movie business, but who goes to the movies anymore? Disney dominates the resort business, but that’s vulnerable to trade wars and global recession.

Disney’s streaming plans are focused on growing profits 3-5 years down the road, but investors are already piling into the stock.

These new investors may be in for a rude awakening. There’s a gulf between what Disney’s signaling on streaming prices and what current investors are anticipating in terms of revenue.

To me, that sounds like a buying opportunity down the road, not today. If you own it, take some profits and let reality sink in.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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