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Disney Stock Has a Long Way to Bounce Back

By Rick Munarriz - Oct 12, 2019 at 6:00PM

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The media giant is seeing its profit targets shrink as its stock price retreats from its all-time summertime highs.

Disney (DIS -0.90%) is falling out of favor with investors. The same media giant that was dazzling the market with its multiplex blockbusters, top-shelf theme parks, and Disney+ buzz has been slipping since hitting all-time highs this summer. The stock is now trading 12% below the unprecedented high it scored in July, while the market is just 2% away from revisiting its peak summertime position.

With earnings around the corner, Wall Street's getting cold feet over the once-hot Disney, and Alexia Quadrani at J.P. Morgan became the latest analyst to scale back her projections for Disney's fiscal fourth quarter that ended last month. She thinks the money Disney is investing in its upcoming namesake streaming service and its other direct-to-consumer platforms is going to sting the bottom line in the near term. She's also concerned that the recent acquisition of key Fox assets will create some bumps during these first few quarters of the integration process. She lowered her earnings estimate to $0.95 a share for the fiscal fourth quarter on Wednesday, down from her previous forecast of $1.05 a share in profitability.  

Mickey Mouse and Minnie Mouse on top of a parade float at Walt Disney World's Magic Kingdom.

Image source: Disney.

Scaling back on great expectations

Quadrani isn't alone. Wall Street was holding out for $1.35 a share in earnings out of Disney in its fiscal fourth quarter just three months ago. The target was pared down to $1.10 a share two months ago, falling below a buck just a few weeks later. Quadrani's estimate of $0.95 a share now matches the consensus average among her peers. 

The whittling doesn't end there. She's taking an even more aggressive view to the new fiscal year that began earlier this month. She now sees earnings clocking in at $5.50 a share in fiscal 2020, a big step down from the $6.30 she was previously modeling. Quadrani remains bullish on Disney, but the $150 price target she was originally targeting for the end of this calendar year has been revised as the goal for the end of the next calendar year. 

It's not just Fox integration costs and Disney+ launch expenses that are weighing on market sentiment. Disney's domestic theme parks are meandering following the debut of Star Wars: Galaxy's Edge that failed to live up to the hype on both coasts. The initial excitement about the surprisingly competitive pricing for Disney+ has been diluted over fears of a pricing war now that Apple (AAPL 0.03%) is launching its service earlier next month with an even more aggressive pricing strategy. Disney still rules at the box office, but the disruption of streaming services is weighing on the release windows that follow a film's theatrical run. 

But Disney will be fine on all fronts. Star Wars: Galaxy's Edge, Disney's largest domestic expansion in more than 20 years, will see the land's signature attraction open at both parks in a couple of months. And making Apple TV+ available to buyers of new Apple devices for a year at no additional cost still can't overcome the limited content that will be available on the service at its launch, compared with what Disney will have with its loaded catalog. Even concerns about the monetization of movies in the future also seem overblown, as the industry will be able to adapt to the new normal once studios know what the new normal is. 

Disney remains at the top of the class when it comes to the market's top consumer discretionary stocks. The stock's recent markdowns may seem warranted, given the margin-gnawing projects and headwinds facing Disney, but investors with a longer-term outlook know there's a great big beautiful tomorrow shining at the end of every day. 

Rick Munarriz owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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