Analysis: DIS PEP NFLX

After you receive this Alert, we will be initiating a position in The Walt Disney Company (DIS) , buying 300 shares at roughly $112.75. Following the trade, DIS will represent approximately 1.18% of the portfolio.

We are bringing DIS out of the Bullpen and into the portfolio as our recent sales of PepsiCo (PEP) provided us with enough dry powder for this additional name. Additionally, we find the stock's roughly 3% post-earnings pullback as an attractive entry point to start a position. You can read our initial Bullpen Alert on the company here. The company's third quarter fiscal 2018 (September) earnings release can be found at this site.

Our bullish thesis on DIS is mainly predicated on:

  1. Disney's development of its own over-the-top (OTT) subscription service.a)CEO Bob Iger called the launch of the Disney direct-to-consumer (DTC) product at the end of 2019 "probably the biggest priority."
    • The app is expected to feature a content library that could be a must-own for consumers. Includes iconic brands in Disney, Marvel, Star Wars original content.
    • The best product compare would be Netflix (NFLX) , and the creation of this app should ultimately increase Disney's overall valuation.
    • We would note that Netflix is also expected to lose current Disney content, including Marvel and Star Wars in 2019, once the OTT platform is launched and the titles are moved to the new service.
  2. A turnaround at ESPN and strong performance from its new ESPN + subscription service
    • Disney has been investing in its sports events/lineups to increase broader appeal. In addition to mainstream sporting staples, new additions include UFC, Italy's Serie A (featuring Cristiano Ronaldo), and eSports
    • Regarding eSports, we would also note that during the Overwatch Finals event aired on ESPN, the broadcast saw an increase in the hard-to-reach 20s crowd, indicating that the trend could prove to be a tailwind for ESPN that has yet to be priced in
    • We will also look for tailwinds related to the legalization of sports betting, including increased subscriber growth and higher advertising revenues.
  3. The company has a robust slate of potential blockbuster movies in calendar 2019 including Captain Marvel, Dumbo, Avengers, Aladdin, Toy Story 4, Lion King, Artemis Fowl, Jungle Cruise, Frozen 2, and Star Wars Episode IX.
  4. A strong consumer leading to increased guest spending at Parks and Resorts.
  5. The acquisition completion and subsequent integration of Twenty-First Century Fox FOXA assets
    • Increases Disney's content output and already impressive portfolio of intellectual property.
    • Expands Disney's global reach in new, attractively growing regions.
    • Broadens global direct-to-consumer (DTC) capabilities.

We are starting relatively small in DIS as we want to leave room to scale into the position over time and we recognize the S&P 500 trades at an all-time high. While we believe the stock has significant room for upside, we also recognize several factors that may put the stock in a short-term lull, including a recently reported mixed-view quarter (we take the position that the quarter was better than what the market indicated) and the upcoming acquisition of Twenty-First Century Fox assets that may have put some investors on the sidelines until completion. Having said that, we believe updates to its OTT strategy and a visible turnaround at ESPN can bridge the gap toward acquisition completion, giving the stock the fire power it needs to breakout to new highs.

We are initiating the position with a $135 price target, which reflects roughly 18 times consensus fiscal 2019 earnings. That being said, we believe there is more room for upside here, both on further multiple expansion and also on earnings growth should management prove it can execute on its OTT service, which should in itself command higher earnings multiple, as well as its integration of the Fox assets it is set to acquire.