Analysts’ Upgrades For Disney Are A Little Late

January 30, 2017

Originally published in partnership with INO.com

http://www.ino.com/blog/2017/01/analysts-upgrades-for-disney-are-a-little-late/#.WI7HHfkrLIU

 

Introduction:    

 

Recently, Disney has been on a sustained uptrend moving from $90 in October of 2016 to $109 as of mid-January 2017, logging a solid 21% gain in the process. I wrote several pieces on Disney when the stock was trading in the range of $89-$93 advocating that Disney offered a compelling long-term investment opportunity considering the growth, pipeline, diversity of its portfolio, share repurchase program and dividend. The shares sold-off in a meaningful way moving from 2016 highs of $120 per share to the low $90s and remaining at that level for months. This 25% decline in the share price presented a buying opportunity in a great large-cap growth company with strong fundamentals. The fundamentals of Disney were stronger than ever despite the temporary ESPN woes. These ESPN issues were being addressed in a variety of ways via Hulu, BAMTech investment, Vice production deal and Sling TV. Once these issues were arrested and clarity with regard to a path forward in returning to growth in this segment was laid out, I posited that these shares would have tremendous upside. These corrective actions have been in the works with the backdrop of all its other segments reporting record numbers.   

 

Analysts’ Upgrades Are A Little Late To The Party: 

 

Recently Disney witnessed a handful of upgrades and positive commentary regarding the shares. On January 6th, Steven Cahall of RBC stated that Disney possess “massive balance sheet potential” and would have more than $65 billion for a transformative acquisition. He upgraded Disney with a $130 price target. On January 3rd, Evercore ISI upgraded Disney with a target price of $120 as well. As of January 3rd, Disney already had ran from $90 to $106 or a 19% appreciation, so where were these analysts in October? (Figure 1)  

 

 

Figure 1 – Google Finance graph showing the uptrend of Disney since late 2016 moving from $90 to $109

 

The stock traded at a higher valuation in 2015. Since then EPS and revenue have increased, fewer shares are on the market due to share buybacks and along with major growth drivers the stock has plenty of room to continue its upward trend. This is especially true as initiatives concerning its ESPN segment begin to yield results.         

 

Is Spider-Man In Play Now?    

 

Sony owns the rights to Spider-Man, right? The short answer is yes however a new agreement between Sony and Disney provides a mutually beneficial scenario. Spider-Man was first introduced alongside the Avengers in Captain America: Civil War in 2016 and will be co-staring with Tony Stark/Iron Man later this summer in Spider-Man: Homecoming. An agreement between Marvel (Disney) and Sony states that Marvel can include Spider-Man in Captain America: Civil War and future properties. Both studios will keep their own box office returns for any Spider-Man related revenue. This could be a major tailwind now that Spider-Man can be included in spinoffs with Avengers and other Marvel characters with no royalty costs. This will be exciting to see this unfold and how Marvel will layer in Spider-Man to its advantage over the next few years in the cinema.     

 

Continued Long-Term Box-Office Catalysts:

 

Disney just recently broke its own annual box office record by recording over $3 billion in box office receipts domestically. This comes on the backs of very successful fourth quarter hits such as Doctor Strange, Moana and Star Wars. Disney became the first studio to reach the elusive $3 billion mark at the domestic box office. This was anchored by its “Big Three”, the three highest grossing domestic films of 2016 with Finding Dory, Star Wars: Rouge One and Captain America: Civil War grossing $486 million, $440 million and $408 million, respectively. Let’s not forget about Zoopotia and the Jungle Book grossing $341 million and $364 million, respectively. It’s noteworthy to point out that all of these films have grossed over $1 billion worldwide with the exception of The Jungle Book missing this mark by $33 million coming in at $967 million worldwide. Disney’s pipeline is loaded with Star Wars, Pixar, Disney and Marvel films over the next five years. Couple that with licensing, merchandising, sequels, theme parks, etc., and this will likely serve as huge catalysts moving into the future.   

 

Conclusion:

 

I’ve written a series of articles highlighting the value that Disney offered throughout the low $90 dollar range for much of 2016. The stock was highly undervalued considering the EPS and revenue growth, increasing dividends, share buybacks, continued growth in all enterprises with the exception of ESPN and its expansion into China (opening its first theme park there). I purchases a handful of shares several times in the low $90 range as well as sold a covered put with a strike of $100 and made $818 on the contract for an 8.2% return based on the amount earmarked for the strike price of $100 per share. The stock traded at a higher valuation in 2015. Since then EPS and revenue have increased, fewer shares are on the market due to share buybacks and along with major growth drivers the stock has plenty of room to continue its upward trend. This is especially true as initiatives concerning its ESPN segment begin to yield results.

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