Walt Disney Co (NYSE: DIS) is celebrating its 95th anniversary this year, and the entertainment giant has sure come a long way since namesake Walter Elias Disney founded the company in 1923.
Besides its amusement parks and iconic animated characters like Mickey Mouse, Snow White and Cinderella, Disney is a conglomerate stuffed with highly-recognizable brand names like Pixar, Marvel, Lucasfilm, ABC, ESPN and, more recently, the digital streaming site Hulu.
Disney stock has slid, demand-wise in the past few years, but its conservatively-run business model and steady earnings make it a favorite of value investors who know a stable company when they see one. That said, the modest dividend (just $1.67 in 2018, although it is set to rise slightly to $1.82 this year) and the glacial pace of stock growth is holding Disney back.
What’s the future hold for DIS going forward? Experts say that, in actuality, Disney shares represent a good value these days, but are by no means a Marvel-like blockbuster.
DIS stock at a glance. Disney is trading about $112 per share at this writing, with a relatively tight 52-week trading range of $96 to $117.90. The consensus analyst one-year stock price isn’t high – at $119 per share, just above its 52-week trading high.
Over the past three years, DIS is up only 5 percent, a paltry figure given the 36 percent rise by the S&P 500. On a year-to-date basis, Disney stock has barely budged from January.
Financially, Disney’s free-cash-flow growth is robust – up 19 percent on a year-to-year basis ending June 30, and the company has kept a firm grip on that cash, as only 25 percent of Disney’s $9.9 billion in free cash flow has been steered toward dividends.
“Disney isn’t doing anything wrong – they’re just plowing all their capital into acquisitions and creating new content,” says Wheeler Winston Dixon, coordinator of the film studies program at the University of Nebraska, and a long-term follower of Disney stock.
While the Star Wars franchise seems to be getting shopworn, other company properties are in full bloom these days.
“When you consider what Disney owns – Lucasfilm, ABC, A&E, ESPN, Marvel, Disneyland and related properties, Lifetime, ABC Studios and a whole lot more – buying Disney right now is like buying a reliable blue chip,” Dixon says. “They’re getting bigger and bigger, and while they underperform the S&P 500, they’re not losing money, either – they’re building up even more of an empire.”
Pros to buying DIS stock. Buying Disney right now seems to call for making a bet on the future of video and broadcasting, experts maintain.
“Disney stock has languished over the past few years,” says Kevin Jacques, a professor of finance at Baldwin Wallace University in Ohio and a former Treasury Department economist. “I attribute this to issues in its media networks area and some concern over how this company is going to grow going forward.
“That said, Disney’s media network now appears to be stabilizing, and given recent acquisitions, the key now is Disney’s direct to consumer streaming service, which is due to be up and running by 2019,” Jacques adds.
A big question going forward on Disney is this – with all of the hits and quality family programming it has in its vault now following recent acquisitions (more on that later), can Disney find a way to differentiate their streaming service from competitors, like Netflix (NFLX)? And, can it do so with a reasonable price to attract subscribers?
“If they are successful on that front, then DIS has significant upside potential,” Jacques says. “If not, then expect to see more of the same in terms of the stock price.”
Current estimates on DIS call for 2019 EPS of about $7.39, which investors can view as a positive. “If investors remain cautious about the stock and put a 17 multiple on it, then we’re looking at a stock price next year of $125 to $126,” he adds. “But over the next three to six months, too much uncertainty exists about Disney’s success in this area to move the stock markedly higher.”
On a ground-level basis, business owners with direct ties to Disney like what they see.
“My outlook on Disney over the next three to six months is positive from a theme parks standpoint, although I don’t anticipate a large jump,” says Dean Gibbons, owner of Park Savers, which sells Disney theme park tickets and packages for clients, and is a long-term DIS investor.
Attendance is up at all their theme parks including Disneyland and Walt Disney World, Gibbons says. “They recently opened Toy Story Land which has been a huge hit with park goers and attendance only increases in the fall with Halloween and the holidays,” he says.
Even beyond six months, the theme parks are looking at major expansions that are going to continue to drive attendance up, and revenue with it. “Star Wars: Galaxy’s Edge will open in 2019 at two parks which is going to bring in a new crowd they’ve never had before,” Gibbons says. “This will have a decent impact on the company as a whole.”
Cons to buying DIS stock. Some stock market experts say it may be best to wait for Disney stock to slide lower before pouncing.
“I hold DIS in client portfolios and I currently rate the stock as a “hold”, says Tom Weary, chief investment officer at Lau Associates in Greenville, Delaware. “I have a price target of $116 and with the stock currently trading around $112, I would wait for a pullback to add to positions.”
While studio entertainment seems robust from a talent and brand name standpoint, it represents only 17 percent of revenues. “The actual largest business segment, at 43 percent of revenues, is media networks, which includes ABC and cable networks ESPN, The Disney Channel and ABC Family,” Weary says. “Concerns about cable-cutting have been weighing on the stock, while also increasing the urgency of rolling out a streaming strategy.”
In addition, Disney has long been the master of developing and monetizing popular characters – think Mickey Mouse and Disney princesses – and acquisitions in recent years have vastly expanded their stable of characters to develop, including Pixar, LucasFilm and Marvel.
“Disney recently won a bidding war against Comcast (CMCSA) for the entertainment assets of Twenty-First Century Fox (FOXA), which will add to the list of characters, but at $71.3 billion comes with some risk,” Weary says. “The acquisition also brings Disney another 30 percent stake in Hulu, which will aid in their developing direct-to-consumer streaming strategy, driven by the need to compete with Netflix and Amazon (AMZN) Video.”
“The execution risk of this major acquisition may hang over the stock until it is completed,” he adds.
The bottom line on DIS stock. While Disney does represent some upside given its slow stock growth relative to the S&P 500, and its strong cash and revenue positions, there is some risk in climbing aboard DIS stock just now. For the longer term, the prognosis is better.
“CEO Bob Iger will eventually retire, so there is some risk in a successful transition to his eventual successor,” Weary says. “However, DIS is highly-profitable company paying a 1.5 percent yield dividend with a long history of success and culture of innovation.
“Any temporary setbacks probably represent good opportunities to add to a high-quality, long-term core holding,” Wearing notes.
Some market-watchers are even more enthusiastic over DIS fortunes going forward. Scott Kubie, chief investment advisor at Carson Wealth, a money management firm in Omaha, Nebraska, says Disney has all the ingredients to outperform over coming years.
“Short-term predictions are always imperfect, but the moderating subscriber losses reported in its last quarter coupled with Fox and anticipation of upcoming direct to consumer offerings should be positive catalysts moving forward,” he says. “We think that if management executes on its plan, fair value for the stock is $135 to $140 near term.”