This should be a great time to own a piece of Disney (NYSE:DIS), but for the second time in as many months a Wall Street analyst has soured on the media giant. Tim Nollen at Macquarie downgraded Disney on Wednesday, lowering his rating from Outperform to Neutral. He's also slashing his price target on the stock from $125 to $105.
Nollen's fading zeal for the House of Mouse is familiar. He's concerned about subscriber declines at ESPN that have been outpacing the slide in viewership for all cable networks. ESPN is the priciest component of most basic cable packages, and it's not just sports-agnostic millennials cutting the cord these days.
Cue the catalysts
Nollen at Macquarie isn't alone. David Miller at Loop Capital also downgraded Disney last month. Miller was also concerned about ESPN -- everyone is, these days -- but his decision to take a neutral stance on the family entertainment juggernaut was primarily a valuation call. The stock was approaching the all-time highs it hit two summers ago at the time of his downgrade, and he felt the shares were getting ahead of themselves.
You'll never find universal love for any investment, and that's what makes a market tick. However, this does seem like an odd time to cool on Disney, especially for Nollen with the stock ticking lower in recent weeks. Nollen argues that he does not see enough catalysts at Disney's other units -- its movie studio, theme parks, and consumer products division -- to offset the fade in cable networks.
Really? Disney's movie studio is on fire. It has had the highest grossing movie for three years in a row. It's had the two highest grossing films, domestically, in back-to-back years. We have sequels to the Pirates of the Caribbean and Cars franchises coming out in the next few weeks, and that's before we get to the frenzy of December's Star Wars: The Last Jedi.
Disney's theme parks had a strong March quarter, and next weekend it opens major attractions in Florida and California. Turnstile clicks may have been slow last year, but just as we're seeing revenue grow for Disney's media networks division despite the cord-cutting toll, Disney's theme parks found a way to make more with slightly fewer patrons last year. Just imagine the numbers now when tourists descend to check out the new rides at Disney's California Adventure and Disney's Animal Kingdom.
The catalysts may not be as clear for Disney's consumer products division, mostly because it has already had years of Marvel, Lucasfilm, and Pixar ownership under its belt. However, as it continues to expand its global reach -- from new TV markets to the opening last year of Shanghai Disneyland -- it will be that much easier for the media giant to grease its potent ecosystem.
Disney stock may not be a market darling right now. The shares have fallen for three consecutive weeks. However, all roads lead to a stronger Disney. Downgrading the stock now doesn't seem to make a lot of sense.