(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS and NFLX.)
Every once in a while the market needs to be reminded that investors' view of a company's stock can change in an instant. Case in point: The Walt Disney Co. (DIS ). On Nov. 6, rumors began to swirl about how Disney may be looking to buy a large group of entertainment assets from Twenty-First Century Fox (FOXA).
Now, all of a sudden, Disney's image has been transformed from a company dragged down by its ESPN sports network into a company viewed as a potential leading streaming content juggernaut. Shares of Disney added over 2 percent to its share price closing at nearly $101 and they were up again on Tuesday as of early afternoon. (See: Fox Held Talks to Sell Most of Company to Disney -CNBC)
It's unclear whether Disney will end up buying most - or any - of Twenty-First Century Fox's assets. But that may not matter. Suddenly the market is focusing on the opportunity ahead for Disney. The diversified entertainment giant once again is a company seen as having movie studio assets and a planned streaming movie and TV delivery system going straight to the consumer, one that could challenge even Netflix Inc. (NFLX). Suddenly, shares of Disney were trading at 15 times one-year forward earnings. That's great for a company expected to grow its earnings by nearly 11 percent in 2018, cheap when compared to Netflix.
Too Much ESPN, Not Enough Growth
Part of the reason why the market has become so negative on Disney shares is that both revenue and earnings growth have been anemic. Concerns around ESPN and the rest of Disney's cable assets were front and center as consumers shifted to streaming services. The company reports results on Thursday after the close of trading. Consensus estimates have fiscal fourth-quarter revenue growth at only 1.79 percent to $13.28 billion, while earnings are expect to increase 3.7 percent to $1.14 a share, according to Ycharts.
Most investors have forgotten that Disney is in the driver's seat and controls its destiny, something the market has discounted. Disney owns its content and has the size and resources to determine to whom and how it wishes to distribute that content. If Disney wanted, it could choose to go many ways with future distribution. In theory, they can cut all cable companies out, and go exclusively streaming, thus following the Netflix model. The only question is how long it takes the company to scale up its subscriber base. Or they can leverage a cable and streaming world and use one business to feed the other.
If successful, a Disney streaming platform could quickly becoming the number two player in streaming content behind Netflix. It could leave other content providers in a tough spot, pressuring them to partner with companies like Disney or Netflix - or opening the door to a wave of M&A.
For what seems like years, the market has been so focused on Disney's problems at ESPN that it has failed to see the true long-run opportunities, fueled by a deep content library, a worldwide brand, deep pockets, and distribution systems to reach millions of consumers.
So it seems quite possible that if nothing else the news of Disney potentially acquiring Fox asset was a wake-up call to investors. The message: Disney is more than just ESPN, and it has plenty of scale and content to drive future growth.
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 holdings. Information 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.