Over the years, long-term investors in Disney (DIS +0.15%) have been handsomely rewarded. Over the past decade, Disney stock has risen nearly 400%. All of that changed about three years ago, when fears regarding the dwindling popularity of cable and rapid adoption of streaming services left investors unsure of Disney's future. Over the previous 36 months, Disney's stock is essentially flat.
Recent moves -- like the pending acquisition of the movie and television studios of Twenty-First Century Fox (FOX +0.00%) (FOXA +0.00%) as well as Disney's move into streaming -- have given investors hope that the worst is over and the company will return to its winning ways.
At least one analyst believes Disney is laying the groundwork that will lead to a successful transition in 2019, with a number of strong catalysts that will begin to benefit shareholders in fairly short order.
Image source: Getty Images.
The analyst
David Miller, an analyst with Imperial Capital, recently upgraded Disney from in-line (equivalent to hold) to outperform (equal to buy). He also increased his price target by 14% to $129 per share (up from $113). Miller thinks Wall Street hasn't given the Fox acquisition the credit it deserves, resulting in more conservative gains in the stock price. To put that into context, Disney's stock has been essentially flat compared to three years ago, though recent optimism has seen the price go up about 6% over the past year.
Miller believes the stock's "tepid performance" recently is the result of uncertainties related to its acquisition of Fox, with questions about the transaction that Disney "could not or would not answer" since the deal emerged. As time passes, those uncertainties will fade, setting the company up for strong results in 2020. Miller sees four distinct catalysts that could send Disney's stock soaring: a strong slate of movies, Star Wars-themed attractions, opportunities in streaming video, and stock buybacks. Below, I'll take a closer look at those assertions and provide some more color on why I largely agree with them.
1. A killer film slate
A look at Disney's recent results bears out how lucrative the company's recent film releases have been. Disney's studio entertainment segment has taken off, as revenue increased 10% in fiscal 2018, with Marvel, Pixar, Lucasfilm, and Disney studios all hitting high notes. In 2017, Disney topped $6 billion in ticket sales for the second consecutive year. The $6.457 in global box office was the company's second-highest take ever, and the third-highest ever for the industry. That pace continued into 2018, led by such hits as Black Panther, Avengers: Infinity War, and Incredibles 2. With a seemingly inexhaustible library of characters, I don't see that changing anytime soon.
A list of Disney upcoming films shows potential blockbusters from each of Disney's studios. Headliners include Avengers: Endgame (the conclusion of the story begun in Avengers: Infinity War), Captain Marvel, Toy Story 4, Frozen 2, Star Wars: Episode IX, and live-action remakes of Dumbo, The Lion King, and Aladdin -- among others. That doesn't even take into account any contributions from Fox once the deal is closed.
2. Star Wars attractions
Disney is indeed banking on the popularity of Star Wars to continue to bring visitors to its theme parks. Star Wars: Galaxy's Edge will debut at Disneyland and Disney's Hollywood Studios in 2019. CEO Bob Iger called it the biggest "single-themed land expansion" ever for the parks, at 14 acres each. Visitors will be able to climb aboard the Millennium Falcon and pilot the fan-favorite ship, as well as staying in a fully immersive hotel that is sure to delight Star Wars fans.
Disney released an artists concept of the the Star Wars-themed hotel. Image source: Disney.
A look at recent results shows that Disney's parks and resorts segment already increased its revenue by an impressive 10% in fiscal 2018, and the long-awaited Star Wars-themed attractions will undoubtedly increase attendance when they open late next year, hitting full stride in 2020. I see the company's moves as further establishing Disney as the theme park leader.
3. Full stream ahead
I agree that the strength of Disney's brand and its treasure trove of content will provide significant pricing power for each of the three streaming services. While Netflix is the undisputed leader in streaming video, I believe Disney's deep catalog of content and characters will make it an immediate contender when it drops its Disney-branded streaming service late next year. The over-the-top, direct-to-consumer streaming service will be titled Disney+, which is due to debut in late 2019 and Disney revealed that the service will contain hit movies from the company's Marvel, Lucasfilm, Pixar, and Disney studios, as well as exclusive original content developed just for the platform -- and that's just one facet of Disney's streaming ambitions.
Earlier this year, Disney debuted its ESPN+ sports-centric streaming service, announcing in September that it topped 1 million subscribers in just over five months. Additionally, Disney's acquisition of Fox will give it majority control of Hulu and a fresh infusion of programming, which the company plans to use to bolster the popularity of the platform.
With some of the hottest movies of the past decade as a foundation, and Disney's undeniable appeal with consumers, I think Disney streaming services will be a hit -- and a new source of revenue -- for the multimedia giant.
4. A resumption of buybacks
Disney shareholders should also benefit when the company resumes its share repurchases after the Fox deal is put to bed. My review of the records shows that Disney has repurchased nearly 20% of its shares over the past decade, much to the delight of shareholders.
As the company is currently in the midst of the Fox acquisition, though, Disney CFO Christine McCarthy announced during the company's third-quarter conference call that it would suspend share repurchases in order to fund the cash portion of the deal. She also said that once the company's leverage returned to levels consistent with the company's single A credit rating, the buybacks would resume, estimating that would occur between Sept. 2021 and Sept. 2022.
However, the bidding war over Sky (NASDAQOTH: SKYAY) and the 22 regional sports networks will likely bring in more than Disney original anticipated, which in turn will bring about the resumption of buybacks sooner than many investors anticipate, which will be a significant benefit in my view.
Why Disney's going places
For several years now, Disney has been setting the stage to prosper in a changing media landscape. With the growing success of its theme park and movie businesses and the massive potential of its streaming platforms, the stock will likely resume its upward trajectory in fairly short order.
