Introduction
Over the previous six months, The Walt Disney Company (NYSE:DIS) has logged a solid 22% gain, moving from ~$92 to ~$113. I’ve been long Disney and wrote several pieces on how the strong fundamentals made a compelling case to buy shares when the stock traded down into the low $90s. The compelling long-term investment opportunity was drawn considering the growth drivers, pipeline, diversity of its portfolio, share repurchase program and dividend. As the first quarter of 2017 comes to an end, Disney continues to deliver strong fundamentals and catalysts moving into the future. At a high-level, Disney’s board has decided to extend Bob Iger’s contract to remain CEO, direct-to-consumer ESPN offerings are in the works, analyst upgrades continue to be issued and Beauty and Beast delivered record breaking numbers to start its film release slate on a strong note for 2017 (Figure 1).
Figure 1 – Six-Month Chart For Disney
Bob Iger Extends Contract
Disney’s Board of Directors announced that it had extended Bob Iger’s contract as Chairman and Chief Executive Officer to July 2, 2019. Bob Iger had been the subject of increasing succession talk after the lead candidate to replace Iger as CEO, Tom Staggs went on to pursue other opportunities and left the company last year.
“Given Bob Iger’s outstanding leadership, his record of success in a changing media landscape, and his clear strategic vision for Disney’s future, it is obvious that the Company and its shareholders will be best served by his continued leadership as the Board conducts the robust process of identifying a successor and ensuring a smooth transition,” said Orin C. Smith, Independent Lead Director of the Disney Board.
Mr. Smith continued: “Mr. Iger has led The Walt Disney Company to unprecedented success during his 11 years as CEO, driving Disney to new creative heights, expanding the Company’s global reach, fostering technological innovation, and delivering year-after-year of record financial results. During his tenure, Mr. Iger has created enormous value for shareholders, with total shareholder return of 448%, compared to 144% for the S&P 500, and a dramatic increase in the Company’s market capitalization to $177 billion from $46 billion.”
“Leading this great company is a tremendous privilege, and I am honored to have been asked to continue serving as CEO through July 2, 2019,” Mr. Iger said. “Even with the incredible success the Company has achieved, I am confident that Disney’s best days are still ahead, and I look forward to continuing to build on our proven strategy for growth while working with the Board to identify a successor as CEO and ensure a successful transition.”
Since Mr. Iger, 66, became CEO, The Walt Disney Company has been recognized as one of the “Most Reputable Companies” in both America and the world by Forbes magazine (2006-2017); one of “America's Most Admired Companies” by Fortune magazine (2009-2017); one of the “World's Most Respected Companies" by Barron’s (2009-2016); one of the “Best Places to Launch a Career” by BusinessWeek magazine (2006-2010); and as “Company of the Year” by Yahoo Finance (2013).
DTC ESPN Offerings
During the annual investors meeting, Bob Iger stated that an ESPN direct-to-consumer offering would launch by the end of the year in 2017. Additionally, Hulu (co-owned by Disney) will offer a live TV service and offer its A&E networks which include History, Lifetime and Viceland. As the consumption of media continues to change, Disney is trying to contend with this migration away from traditional media to embrace social and streaming. Disney has initiated corrective actions regarding the ESPN declines. It recently announced a deal with Hulu for live TV streaming, which will include ESPN live and other Disney/ABC features. Vice and Disney also set a production deal with ESPN that will see programming shared between the two companies. Disney is the largest stakeholder in Vice after putting $400 million into the company, in addition to the piece it holds through its stake in A&E Networks. Disney also announced that it is buying a 33% stake in BAMTech. This is intended to accelerate growth in direct-to-consumer video streaming. This will be a new ESPN-branded multi-sport direct-to-consumer service. The company said BAMTech would work with ESPN to launch a direct-to-consumer, subscription streaming service featuring live sporting events at the regional, national and international levels. As ESPN is reshaping itself to meet the consumer consumption demands, if results bear fruit then this will propel the stock even higher.
Live-Action Adaptations - Beauty And The Beast
After its initial weekend release, Beauty and the Beast earned $174M, which was $4M more than the early estimates. These opening weekend numbers were more than enough to displace the previous best ever March debut (Batman v Superman: Dawn of Justice). It’s also the best debut for a PG-rated movie and easily the top opener for 2017 thus far. This opening gives Disney six of the top seven opening weekends of all time.
A second massive weekend for Beauty and the Beast kept it atop a strong box office. The live-action remake drew $88M in early estimates, which along with strong weekday business brought its domestic take to $326M cumulative. Foreign results continue to be strong as well, giving the picture over $710M cumulative worldwide box office gross. Disney has plans to continue its live-action adaptations after successes with Alice and The Jungle Book with Dumbo, Mulan, Little Mermaid, Aladdin, The Lion King and Cruella De Vil over the next few years.
Summary
Recently, Guggenheim upgraded The Walt Disney Company (NYSE:DIS) to a buy and boosted the firm's price target to $128 from $118. RBC stated the company possesses "massive balance sheet potential" and would have more than $65 billion for a transformative acquisition. RBC upgraded DIS with a $130 price target, as did Evercore ISI with a target price of $120. Goldman Sachs also recently upgraded DIS, issuing a target price of $134. Goldman stated, "We see four key drivers: (1) DIS's FY18 film slate might be its best; (2) ESPN headwinds may abate; (3) Major new park attractions start opening in CY17 through CY19. (4) DIS would potentially benefit the most in the peer group from corporate tax reform." I feel Disney offers a long-term value and growth opportunity. Once the ESPN initiatives begin to show results in the backdrop of all its other franchises continuing to post record numbers, shares will likely have more upside. Disney is addressing its ESPN subscriber losses via deals and partnerships with Hulu, Sling, Vice and BAMTech. The company has a deep and diversified enough entertainment portfolio to make a compelling case that these ESPN fears are overblown. It's noteworthy to point out that DIS stock traded at a higher valuation in 2015. Since then, EPS and revenue have increased, with fewer shares on the market due to share buybacks, and along with major growth drivers, the stock has room to continue its upward trend.
Noah Kiedrowski
INO.com Contributor - Biotech
Disclosure: The author owns shares of Disney and is long Disney. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses.
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