Walt Disney Co (DIS) Taking Strategic Steps in the Right Direction, But Challenges Lie Ahead: Rosenblatt

Walt Disney Co (NYSE:DIS) may be all about its House of Mouse branded legacy, but investors have sent shares dashing roughly 5% today on back of yesterday’s third fiscal quarter earnings that failed to impress.

Rosenblatt analyst Alan Gould finds that the financial results are less of a priority than the entertainment giant’s fresh strategic focus on establishing direct-to-consumer (DTC relationships), which he deems “critical” to Disney’s future success.

In an environment that will not make this an uphill battle for Disney, and one where the future NFL deal is probably two years in the wings, the analyst does not anticipate DIS will attain its traditional 10% premium multiple to the market. As such, the analyst reiterates a Neutral rating on Disney stock while reigning in the price target from $125 to $115, which represents a close to 13% increase from current levels. (To watch Gould’s track record, click here)

For the third fiscal quarter, the giant outclassed consensus on EPS by $0.03 thanks to strength in parks. However, media networks revenue as well as operating income both underperformed consensus and the analyst’s projections, which Gould attributes at least in part to five fewer NBA playoff games last quarter. Additionally, subscribers fell a further 3.5% with ad sales for the fourth fiscal quarter already “pacing down.” Films yielded $2 billion plus in worldwide box office sales, but considering one year prior when Disney was amassing sales 29% higher in an “incredible” quarter, the comp is proving to be tough for the House of Mouse to tackle. The DIS team has maintained its $9 to $10 billion share buyback for 2017.

In reaction to the print, the analyst is taking down his EPS forecast for the fourth fiscal quarter by $0.07 to $1.25, and clipping his EPS expectations for fiscal 2018 by $0.20 to $6.85. In fact, Gould warns he may still lower his predictions when factoring in dilution from the BAMTech deal coupled with the giant’s investment in the new services.

Ultimately, “Disney has always been first and foremost a brand company, and has capitalized on whatever technology allowed it to best monetize those brands, whether it was a theme park dominated company in the 80’s, a home video company in the 90’s, or a cable network programmer over the past two decades. We believe this is the right strategic move, that it is the first step positioning the eventual transition of ESPN and DIS into first hybrid cable/OTT, and ultimately full OTT services down the road. The move validates NFLX’s vision that Internet TV is replacing linear TV; and signals that DIS has chosen to build rather than buy its way into the Internet TV business. While we believe this is the right move, and that DIS has the assets and management to execute the transition; the evolution could be challenging, dilutive and is occurring at the beginning of a new MVPD renewal cycle,” Gould contends.

TipRanks analytics demonstrate DIS as a Buy. Based on 19 analysts polled by TipRanks in the last 3 months, 8 rate a Buy on Walt Disney stock, 8 maintain a Hold, while 3 issue a Sell. The 12-month average price target stands at $115.44, marking a 13% upside form where the stock is currently trading.

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