Why the 2017 Disney Bull-Bear Case May Have Low Bar for Expectations

Walt Disney Co. (NYSE: DIS) managed to return just 0.67% for shareholders in 2016, with a $104.22 closing price on the last day in December. Its paltry dividend yield accounted for most of that gain, but what saved the year for Disney was a rather strong fourth quarter. It turns out that a stronger consumer and an expected lower corporate tax rate in the post-election policies are being viewed quite positively by shareholders again.

The $104.22 year-end price compared with a $108.48 consensus analyst target price from Thomson Reuters, so investors could imply an expected upside of 4.1%. Then there is the 1.5% dividend yield to consider, after it was raised in 2016, for a potential total return of close to 5.6% expected in 2017, if the analysts are correct.

Disney’s 2015 total return for shareholders was 12.9%, including its dividend adjustments. When 2016 was getting started, and when the Star Wars hype from “The Force Awakens” was so strong with the force, the consensus analyst price target was $118.24 back then. Now, a year later, that target is close to $10 lower, which might make for a feeling that the bar of expectations could be quite low.

24/7 Wall St. has evaluated many bullish and bearish scenarios for the Dow Jones Industrial Average components in 2017. There are a lot of things going in Disney’s favor, even if there has been a huge drag from ESPN losses on cord cutters. ESPN lost a half-million subscribers in October alone, and there are fears that cord-cutting trends will only continue in the year or years ahead. What if analysts and investors were just too focused on ESPN? Or what if cord cutters just do not keep following the rapid trends? Deutsche Bank even in November noted that the ESPN subscriber declines have improved and should improve further.

When Disney reported earnings in late 2016, it was not, on the surface, the world’s greatest report, even if shares did manage to rally. The company had $1.10 in earnings per share (EPS) and $13.14 billion in revenue, while consensus estimates from Thomson Reuters had called for $1.16 in EPS and revenue of $13.52 billion. The same period in 2015 reportedly had EPS of $1.20 and $13.51 billion in revenue.

In terms of its business segments, Disney reported that its Media Networks had revenues decrease 3% to $5.66 billion, with $1.67 billion in operating income, down 8%. The Parks and Resorts reported $4.39 billion in revenue, up 1%, but the $699 million in operating income was down 5%. Studio Entertainment had revenues increase 2% to $1.81 billion, but operating income fell 28% to $381 million. Disney’s Consumer Products & Interactive Media unit reported revenues were down 17% to $1.29 billion, as well as $424 million in operating income, down 5%.

One of the big wild cards has been the beloved Star Wars franchise that was purchased for $4 billion. Unless real aliens start arriving on earth, this science fiction universe has literally endless life ahead, and Disney is the one company that can capitalize on Star Wars more than any other company. Proof: a Star Wars theme park! Also, more spin-off films are coming down the pipe too (a Han Solo one included).

Walt Disney shares were added to Merrill Lynch’s US 1 list on December 19, 2016. Despite admitting the ESPN woes, the movie franchises, Trump tax plans, buybacks and parks traffic let Merrill Lynch maintain a Buy rating and $125 price target.