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Is Disney an Attractive Investment Option at Current Levels?

Walt Disney Co ( DIS ) was off to a healthy start heading into 2017, reaching its 52-week high at the end of April. The stock, however, has lost its upward momentum and currently trades almost 15% below its 52-week high. Also, the stock is down 6% year to date.

The primary reason for the entertainment company's decline is the slothful performance of its core media networks segment. Perhaps most remarkably, the House of Mouse has suffered from cord cutters as well as the deteriorating subscriber base of ESPN, of which it owns an 80% stake.

On the other hand, the company recently publicized that its full-year earnings would be almost flat and miss consensus for 3% growth. All that bad news caused Disney's share price to drop to fresh lows for the year, forcing investors to think whether the stock has any meaningful upside potential.

The rise of the online streaming video has been a game changer, putting escalating pressure on the cable industry. Disney's ESPN platform has lost almost 13% of its overall subscribers since its peak. As a matter of fact, the cord-cutting trend is accelerating as American viewers are canceling traditional pay-TV service at a much rapid rate than previously expected.

According to a forecast report from eMarketer, a total of 22 million subscribers have cut the cord on cable TV service this year, representing a surge of 33% compared to that in 2016. Instead of paying for cable TV services, viewers are opting streaming services from providers such as Netflix ( NFLX ).

To adapt to the changing cable TV environment, Disney plans to introduce two new streaming platforms for its ESPN and core properties. The company recently announced that it would end its disruption agreement with Netflix in 2019. By terminating the deal with Netflix, Disney aims to produce in-house content.

Disney acquired a 33% stake in BAMTech in August last year. The company, however, recently increased its investment in streaming technology company from 33% to 75%. Also, it detailed that the platform would serve as the base of ESPN service. The House of Mouse plans to launch this new service next year which would be accessible via an upgraded version of ESPN's app.

It looks like Disney has made a smart move by turning its ESPN platform into a live-streaming platform which will allow it to gain a secure position in the market in which Netflix has failed to make a move.

Although Disney's ESPN platform is experiencing a lot of pain over the past couple years, the company, as a whole, has been performing well. Its free cash continues growing at a healthy rate and currently sits at $8.6 billion. With enormous amounts of cash, the company not only has been buying back shares and paying dividends but also increasing dividend payout at a healthy rate.

The House of Mouse's Studio Entertainment segment displayed disappointing performance in fiscal 2017. However, same will not be the case next fiscal year as the company is on its way releasing several big titles in FY18 including Thor: Ragnarok, Avengers: Infinity War, The Incredibles 2, and Star Wars: The Last Jedi.

Summing Up

As a matter of fact, the streaming industry is governed by well-established players such as Netflix, Time Warner ( TWX ), suggesting Disney will face a fierce competition going forward. Not only had this but the company, initially, will get very less audience to showcase its services.

However, investors should not forget that content is king and Disney is entering the streaming industry with a bunch of hit franchises. With a massive investment in BAMTech, the entertainment company will be able to magnify its capabilities and create a new direct-to-consumer ESPN streaming service. Also, it has numerous cross-promotional opportunities with its movies and theme parks.

On the other hand, the company currently offers a healthy dividend yield of 1.57%, and its payout ratio sits at just 52%, suggesting it still has plenty of room to grow its dividend in the years ahead. The stock currently trades at a price-earnings (P/E) ratio of 17.5, making it an inexpensive stock.

As a result, shareholders looking to initiate a position in the stock should consider buying the stock at an existing price as it trades 15% below its 52-week high.

Disclosure: No positions in the stocks mentioned in this article.

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This article first appeared on GuruFocus .

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.

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