(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS.)

The Walt Disney Co. (DIS) shares have gone nowhere for nearly three years, but could be on their way higher in 2018 to prices well beyond the old highs of $122 last seen in August of 2015, based on the technical charts. The technical setup comes as the company announced it is acquiring assets from Twenty-First Century Fox (FOXA), which could put Disney in a position of resembling Netflix rather than an old media giant plagued by legacy issues at ESPN.

The deal will bring the Disney and Fox movie studios together, while also upping Disney's stake in the streaming media platform Hulu to 60%. This involvement with Hulu will help to propel Disney into the future of media content delivery. As a result, Disney's stock would likely go through a period of revaluation by the market, helping to support multiple expansion, as well as conceivably seeing shares of Disney rise to nearly $135. (For more, see also: Why Disney Stock Looks Cheap Given Growth Outlook.)

Technical Breakout

Shares of Disney have been consolidating since August 2015, when the trouble started brewing at the media giant's ESPN unit where subscriber losses unnerved the market. The current trading pattern in the stock is a pennant or flag formation, a continuation pattern, which is bullish in this case. It indicates that the stock is getting closer to breaking out to the upside. Should shares of Disney rise above $113, it would suggest a breakout and shares could potentially increase to roughly $122, where it would be met by resistance at the old highs. 

 

 

Valuation

Disney trades at only 15 times fiscal 2020 earnings estimates of $7.05, while Netflix trades at over 47 times 2019 earnings estimates of $3.90. Disney is undoubtedly not growing like Netflix either, where Disney is expected to increase earnings by roughly 8% in fiscal 2020, while Netflix is expected to grow by nearly 69%. Additionally, Disney only derived about 60% of its total revenue from its movie studio and media networks segments in 2017.

Fundamental Chart Chart

Fundamental Chart data by YCharts

New Assets

Should the additional assets from Fox help to increase Disney's stake in Hulu and drive streaming media revenue growth, it would seem likely that Disney could trade above previous peak earnings estimates at 18.5 times two-year forward earnings in 2015. Additionally, it would seem reasonable that the media and the movie studio would account for more than 60% of Disney's revenue in the future while providing a wealth of new content to a streaming platform. At 19 times 2020 fiscal estimates of $7.05, shares of the stock would be valued closer to $134. (For related reading, see also: Disney's Stock Advance Could Be Just the Beginning.)

At this point, the charts would suggest the market is preparing for Disney to acquire Fox assets and is preparing for what could be a breakout. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

 

 

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