Disney’s Stock Price Once Again Looks Attractive

Disney’s stock price topped out at $121/share in August 2015. Since then, it’s treaded water between $120 at the top and $90 at the bottom of the range. August 2015 was when CEO Bob Iger first publicly admitted on an earnings call that its Media Networks division (housing ESPN) was seeing subscriber declines.

Of course, since the Disney top, the stock market has increased (the S&P is up roughly 50%) while Disney’s shares have sagged (down about 10%).

When your stock has been a loser, people tend to think you’ll stay a loser. The same principle applies to winners. So it’s natural that there’s not that much buzz about Disney going into 2019.

However, I think this could finally be the year that Disney’s stock shows some meaningful gains. Here’s why:

• Since the start of October (when the market swooned), Disney has meaningfully outperformed the S&P 500. The S&P is down about 10% since then. Disney is down 5%.
• April 11th Investor Day should be a catalyst. The company will demonstrate its new Disney+ streaming service and discuss it and the company’s strategy in general
• Disney+ launches in calendar Q4 and there should be some excitement and newsflow relating to the service leading up to it.
• Disney may unveil a “Disney as a Service” type offering that allows subscribers to get theme park, cruise, and consumer goods discounts in addition to access to their new streaming services like Disney+ and ESPN+. These are assets that Netflix or any other potential entertainment streaming service can’t offer and may lead to higher annual subscription fees for some.
• The core Media Networks division seems to continue to be on a less bad news track.
• The historical price-to-sales multiple for Disney just hit a multi-year trough level. In the last 4 years, its P/S ratio has gone between 2.6x and 4.1x (at the August 2015 high). It recently hit 2.6x again at the Christmas Eve lows and is currently around 2.8x. While I don’t think it’s going back to 4x this year, with a series of good news announcements and upgrades, I don’t think it’s impossible for it to go back up to 3.3x.
• The Fox assets deal is expected to close this quarter. Once this happens, analysts will start to build the value of these assets into their projections for Disney this year and next. After that, the Street is likely to pay much more attention to the potential for all the assets together.
• The divestiture of the Fox RSNs will likely happen in the next couple of months as well. There’s been a lot of speculation about who might or might not bid for these assets and whether or not the price they’ll pay will be higher than $20 billion. Regardless who buys them, or even if it’s lower than $20 billion, the market will likely take it as a positive once the deal is announced and certainty around the divestiture exists.
• There’s also going to be regular Disney earnings as well. The next report is due in February.

So those are the potential “catalysts” this year. What was also interesting was that last week Disney released an 8-K with financial information reorganized showing Consumer Products as part of Theme Parks (under Bob Chapek) and Direct To Consumer (DTC) together with International (under Kevin Mayer). The DTC division already showed $3.4 billion in revenue (although critics howl that the division is losing money — even though many of those same critics don’t seem to mind it a lick that Netflix is still losing money on DTC). It’s likely that Disney is doing this to encourage the Street to value it on a “sum-of-the-parts” basis. And why shouldn’t they?

Are you going to value Disney DTC on a traditional media company EV/EBITDA basis when Netflix has always been valued on a P/S basis? Netflix has seen its P/S ratio in the last 4 years range from 3x — 15x. It’s currently at 9x. What’s appropriate for the DTC and International division of Disney? 6x?

So, let’s play this out.

• DTC and International is doing $3.4 billion a year in revenues now. What kind of initial success will Disney+ have by next year? 10 million subs? At $10 a month? That’s $1.2 billion a year in subscription revenue. Put a 6x multiple on the old and new revenue for the division and you’re talking about $28 billion of value.
• Old Disney is supposed to do $63 billion on revenue (based on Bloomberg consensus estimates) for the year ending September 2020. Let’s call it $60 billion and put a 3.3x multiple of that. That’s $198 billion in value.
• Fox assets. According to the Disney merger proxy from last June, the Fox assets which Disney will acquire were doing about a $20 billion revenue run rate in 2017. Disney has said there’ll be $2 billion in synergies but maybe there’s also some revenue slippage, so let’s assume there will be $20 billion of revenue in 2020. With the same 3.3x multiple, that’s another $66 billion in value.
• Altogether, that’s $292 billion of value. How many shares will Disney have by then? They have 1.49 billion today but will issue more to complete the Fox acquisition (as well as cash to those Fox sellers who prefer cash). Let’s assume they have 1.7 billion shares outstanding.
• That suggests the fair price target for Disney stock after the closing of the Fox assets and assuming a reasonable start to Disney+ is something closer to $172 per share rather than the current $110 per share.

Of course, we will have to see what the shares outstanding are after the Fox deal closes. We’ll also have to hear from Disney management on their projections at their Investor Day, and their plans for a “Disney as a Service” model. And we will have to see if any inter-segment Disney revenue declines once the Disney+ service launches.

However, at a high level, there are a number of reasons which make me optimistic about Disney’s stock price going into this year.

[Disclosure: Affiliates controlled by Eric Jackson hold long positions in Disney]

Commentary by Eric Jackson, sign up for Eric’s monthly Tech & Media Email and his Podcast. You can follow Eric on Twitter @ericjackson .