Disney‘s stock price has risen 23% to $US112.50 since hitting a multi-year bottom around $US90 in October 2016.
In the first edition of RBC’s “Media Fight Club” series, released March 24, the bank addressed four key issues Disney investors face today.
According to RBC, the key to Disney’s continued success will be its ability to keep capitalising on unique brands that consumers love:
Disney is unique in its ability to translate intellectual property across its TV network portfolio, film studio, parks and resorts, and consumer products businesses.
In the Summer of 2015 Disney CEO Robert Iger sent shockwaves through the world of media when he warned investors about the perils of cord cutting and the impact it may have on Disney. His primary concerns revolved around ESPN, a cash cow for Disney that is very much connected to cable subscriptions.
Iger’s comments sparked a year and a half-long decline in Disney’s stock, with its price falling from $US120 to $US90. Here’s Iger (emphasis ours).
We are also quite mindful of potential trends among younger audiences, in particular many of whom consume television in very different ways than the generations before them. Economics have also played a part in change and both cost and value are under a consumer microscope. All of this has and will continue to put pressure on the multichannel ecosystem, which has seen a decline in overall households as well as growth in so-called skinny or cable light packages.
ESPN’s experienced some modest sub losses although those have been less than reported by one of the prominent research firms and the vast majority of them, 80%, were due to decreases in multichannel households with only a small percentage due to skinny packages.
RBC thinks that Disney is doing a good job of addressing this issue by focusing on gaining a heavy digital media footprint to supplement losses from cord cutting. The bank noted, “upcoming launches of Hulu and Youtube TV as likely to provide an inflection in net subscriber trends.”
2) The parks
Margins at the Disney Parks have been important to Disney for a long time (FY17/18 total Parks & Resorts consensus margins are 20.7%/21.6%). RBC thinks that margins can continue to grow, or at least remain steady, considering the improvements the company has recently made and new cost cutting initiatives. The bank added, Disney’s portfolio approach “allows for short-cycle/cash-generative businesses (e.g., Media) to offset against longer-cycle/capital intensive businesses (e.g., Parks).”
3) The film studio
According to RBC, Disney’s feature film business has been going so well that the only risk they see is that things eventually, one day, won’t be so great. Major franchises like Star Wars, Marvel, Pixar, and the Disney Princesses have been a major boon for Disney Studios. Check out Disney’s hits from 2016:
Just recently Disney had another hit, the live action version of “Beauty and the Beast,” which smashed the March box office record. For now, RBC thinks that Disney can keep the good times rolling with plenty of more content to run through within their various franchises.
4) Could Disney be acquired?
It may be speculation, but RBC thinks there is a chance that Disney could be bought, possibly by Apple. As the hunger for content grows among major companies like Amazon, Netflix, Google, and Apple; RBC thinks that Disney may be ripe for the picking.
For these reasons, RBC reaffirmed their outperform rating and $US130 price target on Disney. DIS is up 7.71% so far this year, closing at $112.24 on March 23. Click here for a real-time DIS chart.
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