Rogue One: Is The Force Still Strong With Walt Disney Co Stock?
For the most part of the year, Walt Disney (NYSE:DIS) stock underperformed the broader market as the concern around its ESPN franchise weighed heavily on the stock. But in the last two months, the stock has shown remarkable strength, rallying around 15% as investors realized that the ESPN problem was overblown. The momentum in the stock was so strong that, in spite of missing estimates on both the top and bottom line in its latest earnings report, the stock continued to move upwards, gaining around 5% since then. But the question for many investors now is whether the momentum will continue? Is the force still with Disney stock?
Shorts Are Fleeing Disney Stock
The short interest in Disney has seen a consistent decline, after climbing up in the first half of the year. Sine July, the short interest has come down by a massive 54% from 41.8 million shares to 18 million shares (Nov end). In the latest reporting period, the short interest declined by a massive 38%. This consistent decline in short interest indicates that the ESPN problem was overblown and investors are turning bullish towards Disney stock.
Another Solid Performance
Over the weekend, Disney released its much awaited Star Wars spin-off "Rogue One" which was received very well by the audience. The movie raked in more than $155 million in the opening weekend in North America. It is the second largest collection for a December opening, after the previous Star Wars Movie, The Force Awakens, which went on to collect more than $2 billion in global ticket sales. Rogue One, which is the prequel to the first Star Wars movie, collected an additional $133 million in the overseas market. While the domestic collection exceeded analysts expectations, the total global collection of $290 million came in just shy of analysts estimate of $300 million. The movie has not yet opened in markets like China and Australia.
The Annuity Model
It is true that "Rogue One" will not be as great a success as Force One in terms of global collections and reviews, but it is important to remember that the movie is not part of the actual Star Wars series but a spin-off. Disney is trying to expand the Star Wars universe, creating new characters and storylines, as it has done with its other franchises such as Marvels, which will allow it to churn out new movies. Disney is planning to create an annuity model of sorts with a Star Wars Movie every year. The VIII Episode of "core" Star Wars is scheduled to release next December. The pressure will be on Disney to keep getting fans back to the theaters for another three to four installments of Star Wars.
It is not the ticket sales alone through which Disney is monetizing the Star Wars franchise. Disney is using the Star Wars popularity to sell Star Wars merchandise and is also planning to drive footfalls to its theme parks. It is Disney's ability to generate revenues from the movies through the theme parks and merchandise sales which gives it a unique advantage. In Q1 2016, when 'The Force Awakens' was released, the global sales of Star Wars merchandise reached $3 billion, helping Walt Disney to post one of its best quarters ever. While the sales of the Star Wars merchandise declined after Q1, the release of Rogue One is likely to regenerate interest in the merchandise. Rogue One will also accelerate the sales of Star Wars video games. It is also adding the "Star Wars Lands" to Disneyland in California and its Hollywood studio in Orlando where you can take a ride on the "Millenium Falcon" and dine in Star Wars themed restaurants.
Disney bought Lucas Films, the producer of original Star Wars series, back in 2012 for around $4 billion. At that time many analysts were concerned that Disney is overpaying for the studio. But after the two Star Wars movies, it is looking to be a good purchase for Disney.
Can Studios Make Up For ESPN?
It has been quite a year for Disney's Studios and Entertainment segment. The segment has produced four of the five top-grossing movies of the year. During FY 2016, revenue from the studio segment came in at $7.3 billion, up 28% from FY 2015 and operating income came in at $1.97 billion, up 37% YoY. The long-term performance has also been excellent. This segment has delivered robust revenue and operating income CAGR of 8.3% and 34.3%, respectively, over the past five years. And Disney has a strong line up for FY 2017, starting with "Moana" and "Rogue One". But can the strength in the Studios segment make up for the weakness in ESPN, which is losing subscribers at an alarming rate? According to Nielsen, ESPN lost around a million subscribers during the month of October and November, with average loss much higher than the average monthly subscriber loss of 300,000.
Of late, declining subscriber numbers have been in the limelight, casting a shadow on the Disney stock. Disney has been able to make up for the loss in subscribers by increasing its affiliate fees. In FY 2016, the media segment saw an increase of 2% in revenues. To mitigate the loss of subscribers, Disney is investing in live streaming as well as partnering with OTT players such as DirecTV. While the subscription losses will continue, ESPN can offset the loss by raising the affiliate fees and partnering with OTT and live streaming players. There have also been calls for Walt Disney to spin-off or sell the ESPN franchise. According to RBC, sale or spin-off of ESPN will create Value for shareholders. But it is unlikely to happen anytime soon.
Disney Stock A Good Buy
Disney stock has underperformed the S&P 500 (INDX:SPAL) and consumer discretionary sector YTD. However, the stock has gained momentum in the last two months, returning around 15%. In a bullish crossover, the 50 day SMA crossed the 100 day SMA line some days back, indicating that Disney stock is currently in a bullish trend. The short interest in the Disney stock declined by a massive 38% in the latest reporting period indicating that the investors' sentiment is changing. The stock is currently trading at a PE (ttm) of 18.6 and a Forward PE of 15.6, both below its past three years average and also below the S&P 500 current PE of 26.5. Disney is also a strong cash generating machine. In FY 2016, the company generated about $13.3 billion in cash from operations and about $8.4 billion in free cash flows.
Disney has made a strong start in FY 2017 with "Moana" and "Rogue One". Moana topped the box office list for three consecutive weeks, while Rogue One garnered around $300 million in global sales during the first weekend. The company has a strong lineup for 2017. Also, the concern around the ESPN franchise is declining. Disney stock remains a good long-term buy, in spite of the recent rally.