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

Walt Disney Co. (DIS) shares are surging today by over 6 percent to about $112, as tax reform moves one step closer to reality. Meanwhile, renewed speculation that the company could make a play for 21st Century Fox (FOX) assets ignited a bid in the stock.

A corporate tax cut could boost Disney's earnings estimates for fiscal 2018. Should the new tax rate take effect in 2018, it could fuel earnings growth potential of nearly 25 percent versus 2017. Meanwhile, the addition of Fox assets to Disney's content platform could create a media and movie studio juggernaut when the company launches its new direct-to-consumer streaming product, helping to ignite top-line revenue growth.

At its current PE ratio of almost 17, Disney stock could rise to $120, a spike of nearly 15 percent from its closing price of $105 on December 1. The shares could rise even higher should Disney begin to see accretive growth from the addition of any assets acquired from Fox. (See also: Fox Held Talks to Sell Most of Company to Disney.)

Estimates Could Rise

DIS EPS Estimates for Current Fiscal Year Chart

DIS EPS Estimates for Current Fiscal Year data by YCharts

Analysts are currently forecasting that Disney earnings will grow by roughly 9 percent in 2018. But should the tax reform take hold then, that number could increase significantly, and suggest growth of nearly 25 percent, based on the savings the company would have seen in fiscal 2017. 

Tax Savings

DIS Pre-Tax Income (Annual) Chart

DIS Pre-Tax Income (Annual) data by YCharts

Disney reported pre-tax income of $13.79 billion in fiscal 2017, and had provisions for taxes of $4.422 billion, giving the company an effective tax rate of 32 percent.

With an effective tax rate of 23 percent – assuming a 20 percent corporate tax rate and the impact of state and local taxes – Disney's provision for taxes would have fallen by 29 percent to $3.17 billion, boosting net income to $10.25 billion. That's an increase of 14 percent.

If we increase 2018 projected earnings estimates by the 14 percent savings Disney could have had in 2017 of $6.21, it would boost forecasts to $7.07 a share. That's a growth of nearly 24 percent from 2017 earnings of $5.70.

Streaming Growth

Disney could also see the added benefit of top-line revenue growth from its future streaming media services. If it can add Fox assets to its current content library, it could bolster an already-strong programming lineup. Additionally, Disney could add an international source of users, with SKY.

If Disney gets the benefit of streaming media growth, and the savings from a falling tax rate, the stock could have a huge run in 2018. And the stock's recent spike could be just being the start of something much bigger. 

 

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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