Walt Disney Co (DIS) Remains Strong despite Concerns over Media Network

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Walt Disney Co (NYSE:DIS) shares are among the media stocks that have faced bearish sentiments. The cord-cutting problem refuses to die down though concerns on that issue were limited only. The company is one of the few companies that consistently performed well and its earnings also came in above the estimations. Its earnings rarely disappoint investors. However, though results were good, there was a sense of concern that it was completely dominated by its Studio division. Out of ten parameters, the company outperforms in seven categories, and the other three belongs to the valuation metrics indicating premium to the industry average. There is also a feeling that even if there is trouble in cable distribution, there is an alternate system to help overcome the issue.

Exposed To Weaknesses

It is a fact that Walt Disney Co (NYSE:DIS) stocks are currently exposed to weaknesses much to the surprise of the investors currently. For instance, its Star Wars: The Force Awakens smashed box office records while its Rogue One trailer enthralled viewers a few days back. However, investors and analysts are only looking at the current weaknesses that disturb the force. Its cable properties are facing pressures of contraction in the subscription tallies. Its ESPN, Disney Channel, and other networks face the downside in subscribers’ pressures. Though the company’s theme parks, which were rated as world-class, were growing at a strong pace, the strong American currency plays a truant in global visitor numbers.

The management changes in Walt Disney Co (NYSE:DIS) have also come under the sharp focus of the investors. Its COO, Tom Staggs, resignation from the company surprised both within and outside. That is primarily because he was hailed as the heir apparent to the current CEO, Bob Iger, who is expected to retire in 2018. That is no doubt a big blow to the investors’ confidence as it comes on the heels of the cord cutting. As a result, the company needs to find a successor and that is a distraction from the main business in the immediate term.

Exclusive Content

The focus on Walt Disney Co (NYSE:DIS) management falls because of its unique content too, which is not an easy one to duplicate. There was no doubt that the company has established several successful character franchises, which ran through a different cycle of consumer products, figurines, and games. That included theme parks, as well as, their debt on theaters through its studio entertainment division. That was evident with the company generating sales volume of over $1 billion each in Disney Jr., Spider-Man, Cars, and Monsters, Winnie the Pooh, Star Wars, and Mickey Mouse. While it could continue to provide a long-term success, the fresh management should also follow such a policy that will ensure continued generation of revenue.

Cable Still Has Relevance

Walt Disney Co (NYSE:DIS) might have witnessed a loss of subscribers or cord cutting. However, the broader market in the ecosystem does not provide any alarm bell and still holds the forte well. For instance, Comcast Corporation (NASDAQ:CMCSA), which too saw the cord cutting issue initially, has addressed the issue strongly. Its fourth quarter results clearly indicated that it was able to add 85,000 cable video subscribers when Disney was having the other way. Also, it turned out to be the best quarterly additions in nearly eight years. Therefore, it is premature to say that the loss of subscribers will continue in the upcoming quarters too though such threat cannot be discounted completely. However, there is hope that things can turn around and that the magnitude can also become lower than predicted.

It is also a different story that cable firms adopt a different approach that excludes Walt Disney Co (NYSE:DIS) from their bundle of offers. Those bundles were termed as ‘skinny bundle’ meant to lure subset of subscribers since they view the complete featured cable service with a limited utility only. Such move might help the cable firms and broadcasters like Verizon Communications Inc. (NYSE:VZ). However, that will not do any good to the Disney’s problem of losing subscribers.

Investing In Alternative Options

Effectively, Walt Disney Co (NYSE:DIS) is aware that it would continue the losing side if it failed to expand its distribution tactics that is beyond the cable distribution system. Therefore, investment in alternative ways is one of the options. For that purpose, the entertainment firm has bought Maker Studios giving it an entry to an online property. The advantage is that it has a strong millennial base, which makes it difficult to reach by traditional cable. Aside from that, the company has also been focusing on platforms such as Jaunt that is engaged in Virtual Reality, which will rule the rust in a couple of years from now. Therefore, the alternative plan is to bring content stable to a fresh audience through the different ways. The bottom line is that revenue loss due to subscribers’ loss will not be felt.

Key Financial Metrics

Walt Disney Co (NYSE:DIS) is delivering better than the industry. For its three-year average revenue growth was 7.5% while the industry managed with 2.1%. Similarly, its profit growth was 13.8% in the same period whereas the industry could get only 2.6%. Its operating margin for the trailing twelve month period was 25.8%, which was higher than 21.9% that the industry average has. Its return on assets and equity for the TTM were 10.3% and 20.6% compared to the industry average of 6.8% and 18.8% respectively. Its debt to equity is also 0.3 only compared to 1.0. It is because of these reason, the PE for TTM period was 18.0 times, slightly above the industry’s 17.4 times. Similarly, price to book commanded 3.6 times when the industry could get only 3.3 times. In the same way, price to sales were 3.0 times while the industry average was only 2.1 times in the TTM period.

Conclusion

It is true that Walt Disney Co (NYSE:DIS) is either correctly priced or carries a modest premium. However, its forward PE 15.45 times suggested that there is scope for potential upside rewards. The company has a history of delivering strong results. Therefore, though concerns will continue to remain, the stock will also remain strong.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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