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Investors with a contrarian view typically like to buy stocks when everyone else is selling them. The thinking is that when a high-quality company suffers from rising negativity, that pessimism can often go too far – and can eventually create a fantastic buying opportunity.
That seems to be the case with The Walt Disney Co. (NYSE: DIS). Disney stock is down approximately 20% from its 52-week high. The problem stems from comments Disney CEO Bob Iger made on the company’s last quarterly conference call in August about one of Disney’s flagship media properties, sports network ESPN.
But investors selling Disney stock just on fears over ESPN are making a big mistake.
Is ESPN in Trouble?
Disney’s CEO caused quite a stir among investors when he said that ESPN had experienced some subscriber losses, due to the changing way in which people are consuming media. People are not watching nearly as much traditional television as they used to, instead opting for Internet streaming options. This stoked fears of the dreaded “cord-cutting” and the impact it would have on ESPN.
It’s true that Disney saw a decrease in advertising revenue for ESPN last quarter. But it’s important to note that this was more than offset by growth in affiliate revenue. ESPN performed well last quarter due to contractual rate increases, as well as an increase in subscribers. Thanks to this growth, ESPN helped the cable networks business increase revenue by 7% last quarter, year-over-year.
Going forward, I believe ESPN will be just fine, because it is still the dominant brand in sports programming. It has licensing agreements with the NFL, the NBA and Major League Baseball that extend into the next decade. And ESPN is the premier brand in live sports. This is a huge advantage, as management stated on last quarter’s conference call that 96% of all sports programming is watched live. As a result, it’s likely that no matter how consumers watch television, they will still be watching ESPN.
More broadly, Disney remains a hugely successful company. It is growing revenue and earnings at a nice clip, even in a challenging environment of a strong U.S. dollar. The company operates world-class brands across several segments, which include its media networks, parks and resorts, studio entertainment, and consumer products divisions.
On a segment-by-segment basis, Disney grew revenue by 13% in consumer products, 9% in media networks, 6% in parks and 2% in studio entertainment through the first nine months of the fiscal year. Overall, Disney grew revenue and earnings per share by 7% and 16%, respectively, through the first three quarters.
Clearly, that does not indicate that Disney is deteriorating at all.
Disney Stock Is a Great Value
While investors panic and rush for the exits, long-term investors can take this opportunity to profit from the market’s irrationality. Thanks to its declining stock price, Disney’s valuation is now more attractive than it has been at any point this year. Disney stock now trades for 21 times trailing 12-month earnings, which is close to the market’s average valuation multiple.
I believe Disney is worth more than the market multiple, because it has higher-than-average growth potential. Going forward, Disney’s earnings should continue to grow thanks to continued success at its theme parks, resorts and media networks. And the upcoming release of “Star Wars: Episode VII – The Force Awakens” has the potential to make Disney billions of dollars – not just in ticket sales, but also through the immense merchandising opportunity.
Therefore, investors should view Disney’s stock price decline as a great buying opportunity.
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