- Cash Flows, earnings & revenues are all re-accelerating but the share price continues to tank.
- Although ESPN is almost written off by the market, it is still a huge cash cow for the company.
- Disney franchises have reshaped the company to include adults. This strategy will pay huge dividends over the long term.
Walt Disney Co. (NYSE:DIS) stock is now around $90 a share and many investors and shareholders alike are wondering when the final bottom will be in. As I have outlined in my previous commentary, the market is really penalizing Disney stock at present due to the difficulties it is facing in its media networks segment. The well-publicized cord-cutting taking place in the market at present is primarily due to the increasing television service rates. This is putting pressure on subscriber levels especially in the lucrative ESPN network (see chart).
Therefore, Disney has pivoted by buying BAMTech which potentially could protect against the potential increase in sport rights fees combined with lower subscriber numbers. Furthermore, when you combine the growth ESPN is achieving internationally along with providing its content on multiple platforms and bundles, I personally believe the market is reading too much into this section of Disney's business.
Financials Look Very strong Over Recent Quarters
In fact, Disney's media Networks makes up around 53% of the company's annual operating income which is why the market is paying attention to poor subscriber growth at present. However, other divisions of the business are really taking up the mantle for media Networks. For example, the 10-year average revenue growth percentage for the company is just over 5% but the revenue growth percentage over the past 12 months has surpassed 13%. EBITDA growth over the past 12 months is 18.5% compared to a 10-year average of 11%. Free cash flow on a trailing 12-month average is 7.8 billion which again shows a re-acceleration of free cash flow over the past few years compared to its historic mean.
All this adds up to a top-line estimate of $56.15 billion this year along with earnings of $5.78 per share. Therefore, if the share price keeps dropping but revenues keep rising you are going to see this company's sales multiple probably drop to around the 2.5 level. This number would be substantially lower than its historic mean and would put the Disney stock in an attractive buying territory in my opinion.
ESPN Still Spins Off Huge Cash Flows For The Company
The reason why I see a floor in Disney stock is because the company has strong compelling competitive advantages. Despite the company's current ESPN woes, the network is still a cash cow and there are few companies which match the financial prowess of Disney. Even stagnant ESPN reviews still provide the company with substantial cash flows to go out and buy sports rights for future subscribers. The BAMTech deal is a move towards live streaming which definitely is the future and you can bet Disney will remain a part of it.
Blockbusters From Pixar, LucasFilm & Marvel Will Generate Revenues In Other Forms For Years To Come
Furthermore, I believe the market is discounting the recent success that Disney has had with its Pixar, Lucasfilm and Marvel franchises. Up to now, Disney has been the go-to entertainment brand for children but these franchises are definitely attracting adults too. Bears will state that films are a hit-or-miss business but this is where Disney comes into its own. Leverage is the name of the game here and Disney does it in spades.
Through experiences at its resorts plus DVD sales and Merchandising, Disney derives long term value from its films. Therefore, investors need to look beyond box office totals that hit films are collecting. Instead concentrate on how many blockbuster hits Disney and its franchises can roll out every year. Recent years have been very strong in studios and if this trend continues then these hits are going to provide long-term value for Disney's shareholders
Where to buy
If we look at a chart of Disney stock, we can see that the pattern of lower lows is definitely worrying. Furthermore, the share price is currently trading well below both moving averages (50-day and 200-day) so technical traders for the most part are out of Disney stock right now. I would wait for the averages to cross before going long again.
As a long term hold, I am bullish on Disney stock. Market timing though is probably the most difficult skill of all. Personally, I feel this stock won't spend too much time below $90 a share as its financials are simply too strong. ESPN subscriber numbers will eventually bottom out which will enable the market to value this stock using different metrics going forward.