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

On December 31, 2016, S&P reiterated its Buy rating and $110 price target on Disney. After an interstellar opening weekend for the Star Wars feature “Rogue One,” JPMorgan reiterated its Overweight rating and it named Disney as one of its top picks for 2017. The firm said:

We believe this impressive opening weekend performance of the first spin-off film in the Star Wars universe solidifies it as a major franchise for Disney with great longevity that is also likely to translate into solid near-term Consumer Products sales and longer-term greater attendance and per-cap spend at the two Star Wars Lands at Disney World and Disneyland currently being built that we expect to open in 2019 at the earliest. We remain positive on Disney as one of our top picks for 2017, as the success of the company’s films and franchises continue the company’s multi-year, cross-divisional, hugely profitable strategy that should lead to outsized growth compared to peers.

As this is a bullish and bearish analysis, 24/7 Wall St. wanted to feature one of the more cautious analyst calls made in recent weeks too. Cowen maintained a mere Market Perform rating in early December, but its meager $90 price target shows that not everyone is a believer here. Cowen’s report even said that the recently renewed enthusiasm for the name may be a bit premature, and the firm addressed the Iger CEO succession not being in place now:

While this narrative is interesting, a lot rides on what happens in the film segment, and we remain concerned both about overall industry dynamics and the risk that Disney’s film performance reverts towards the mean. We also think that projecting the health of the cable ecosystem out into 2018 remains tricky, especially given the potential for virtual bundles to be a disruptor (granted, positive or negative) over the next year. Finally, CEO Bob Iger still does not have a clear successor, which introduces another potential risk factor.

Other things are going well for the movies unit too. It turns out that half of the 2016 top grossing films were based on comic book characters or adaptations. Disney has Pixar and Marvel, on top of its traditional Disney franchise films. Its movie library is endless, with many films and characters going back long before all of us were alive. There are also said to be hundreds of characters that were in various development stages for future film and franchise releases for films and all that follows.

Disney’s theme parks business, particularly with a strong launch in Shanghai China, may be close to immune from economic woes. Families were going to the Disney parks before, during and after the recession. Even rival numbers from Universal theme parks are still showing strength.

Maybe it takes being a parent and loving film and entertainment to really be attached to Disney these days. If you are a parent, there is probably a 90% chance that at least one of your kids is hooked on one or more of Disney’s characters. Even adults (older and younger) have brand loyalty to some of the characters.

For years it has been the case that Disney was an expensive stock for investors. Now its stock woes of 2016 may have changed that. Disney’s growth has been steady and is expected to remain steady. The $42 billion in revenues from 2012 were over $55 billion in 2016 and are expected to rise to $66 billion by 2020. Disney now trades at 18 times current earnings, but that is compared to just 16 times expected 2018’s anticipated earnings and 14 times expected earnings in 2020.

Disney also has room to improve on its dividend. Its semiannual dividend was hiked at the end of 2016 and went from $0.71 to $0.78 per share. If Disney is earning close to $6.00 per share in 2017, then it is paying just 25% or so of its earnings out to shareholders before considering stock buybacks. The dividend yield of 1.5%, which is ranked as the fourth worst yield among the 30 Dow stocks. Disney could do much better on its dividend if it chooses to do so when it gets a new CEO in 2018.

Disney shares have a 52-week trading range of $86.25 to $106.75, and the market cap currently is $166 billion.