After several weeks of rumors and backdoor negotiations, The Walt Disney Company (DIS) has finally shaken hands with 21st Century Fox (FOX), sealing the deal on various assets, which could reshape the media industry and, in the process, Disney stock.
If you’ve been following the drama like I have, you’ll understand that reshaping the media industry is secondary to the advantages Disney aims to acquire. It cares more about compiling an arsenal that can help fend off digital rivals such as Netflix (NFLX). I went over several of these advantages last week, including Disney’s current ownership stake in Netflix rival Hulu — a stake that now jumps to 60% by virtue of Fox’s own 30% stake.
Combined with Disney’s rich library of content and its own standalone streaming efforts, Disney’s revenue growth forecast from its future streaming media services seem discounted. And this now makes Disney stock one of the better bargains in the media space. Take a look at the chart, courtesy of YCharts.
When compared to the likes of Comcast (CMCSA) and even the aforementioned 21st Century Fox, Disney stock has been one of the weaker-performing media names over the past year and three years. Among the large-cap peers, Time Warner (TWX), which has suffered through similar subscriber growth challenges and CBS (CBS) have been worse.
But I now expect Disney, whose shares have gone nowhere for almost three years since reaching $122 in 2015, to head higher in 2018. From a valuation perspective, the stock is attractive here at only 17 times fiscal 2018 estimates of $6.22 per share, versus a P/E of 19 for the S&P 500 index. Plus, Disney’s forward P/E falls two points to 15 based on fiscal 2020 estimates of $7.05 per share.
The market will go through a re-pricing period as Disney, which should command multiple expansion, begins to detach itself from old media and shifts its business towards something that reflects closer to Netflix. As I noted last week, Disney’s 2018 revenue and earnings estimates are still low, suggesting the market has not accurately priced the company’s ability and willingness to successfully reset its business.
The company will report first quarter fiscal 2018 earnings results some time in the first week of February. Wall Street expects EPS of $1.61 on revenue of $15.51 billion — numbers I expect Disney to easily beat. What’s more, I expect a revaluation period of Disney stock to occur within the next several quarters, which should propel Disney shares towards $130 to $135 by the end of 2018.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
