With the stock down about 6% in the past three months, Walt Disney (NYSE:DIS) is looking like an enticing bet again. Indeed, I'd go as far as to say that Disney is my top stock to buy in September.

Of course, the House of Mouse does have some problems it will need to overcome. But, all things considered, investors seem to be underpricing both the durability of Disney's powerhouse media brands and the company's upside potential as it transitions to a direct-to-consumer distribution model.

Man looking at a stock chart on his laptop while drinking coffee

Image source: Getty Images.

The raw numbers

Metric

Walt Disney

Trailing-12-month sales growth

(1%)

Trailing-12-month EPS growth

1%

P/E

17.8

Dividend yield

1.5%

Payout ratio

27.6%

P/E = price-to-earnings ratio. Data source: Morningstar and Yahoo! Finance. 

Disney's business seems to have been at somewhat of a standstill recently, with revenue down 1% and EPS up 1% year over year in the trailing 12 months. This lack of meaningful growth in its overall business is primarily due to tough comparisons in Disney's studio entertainment segment and lower advertising revenue at ESPN.

The good news is that Disney's underwhelming performance recently has driven shares lower, making the stock's valuation much more conservative than it was six months ago, when Disney's P/E briefly surpassed 20.

DIS PE Ratio (TTM) Chart

DIS PE Ratio (TTM) data by YCharts

Why Disney stock is trading lower

Disney's current business model, namely making money from ESPN, is highly dependent on cable networks -- an industry that is giving up subscribers to over-the-top services like Hulu and Netflix. And it's hurting Disney's business. During the last two quarters, ESPN faced ongoing difficulties at cable networks as viewership and subscribers declined amid a rapidly changing media landscape. 

Disney stock was hit hard following its two most recent quarterly earnings reports.

DIS Chart

DIS data by YCharts

ESPN's troubles were particularly pronounced in Disney's most recently reported quarter, when cable networks revenue and operating income declined 3% and 23% year over year, respectively.  The segment's operating income decline was driven by plights at ESPN. In addition to ESPN's higher programming costs and costs associated with severance packages and contract terminations, ESPN advertising revenue during the quarter was negatively impacted by declining viewership and ad units.

While higher programming costs can be mostly forgiven, considering they were primarily driven by ESPN's new NBA contract, a decline in ad revenue is worrisome.

Investment thesis

Fortunately, Disney has some aggressive plans for reinvigorating ESPN's business and unlocking more value out of its valuable studio franchises. Last month, Disney announced plans for two new streaming services -- one for ESPN and one for Disney. Disney's ESPN service is expected to launch early next year, and the company's Disney-branded service is expected to launch in the second half of 2019.

According to Disney CEO Bob Iger, the revenue- and profitability-generating capability of its direct-to-consumer strategy will eventually be "substantially greater" than the business models that Disney is currently served by. 

Of course, Disney's direct-to-consumer services may not prove to unlock as much value as management hopes. But it's unlikely that reducing Disney's dependence on a middleman over time will not help improve results.

Further, investors shouldn't think Disney is taking on this aggressive new strategy blindly. Disney management has said its nascent offerings on new platforms like Sling TV, Hulu, PlayStation Vue, and YouTube TV -- all over-the-top platforms that resemble Disney's strategy to build app-based services -- are showing a very encouraging customer response. Indeed, in Disney's second-quarter earnings call, Iger said these new services are just as valuable to Disney from a per-subscriber pricing standpoint as traditional platforms. Imagine when Disney transitions to an app-based media platform of its own -- one that Disney can distribute at scale, priced at management's discretion.

Still from the Beauty and the Beast live-action film

Image source: Walt Disney.

After a pullback in its stock price in the last three months, Disney stock -- at $102 -- is my top pick for September. The Street is missing the big opportunity in Disney's aggressive direct-to-consumer plans.

Daniel Sparks owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.