Disney's (NYSE:DIS) stock was sent into a tailspin last month, when CEO Bob Iger uttered something Wall Street had hoped it wouldn't hear: The cord-cutting phenomenon is real, and Disney may start feeling the effects in its financials.
What followed was a sell-off that brought Disney's shares from a pre-earnings peak of more than $122 to prices below $100. At $104 as of Sept. 19, they remain well off their recent high, despite good numbers for the quarter.
Disney wasted little time sending a strong message to the market about what it thinks of the sell-off. It bought $2.4 billion of its own stock.
Take a closer look
As investors, we should never blindly follow the moves of any company or well-known Wall Street tycoon. But we can use them as cues to dig deeper into companies on our own and decide if there's an opportunity to be had.
In Disney's case, there is. We'll see why that is, but let's first take a step back and recap the cord-cutting issue that drove the stock down.
There's no doubt that cord-cutters pose a threat to Disney. The company's media-networks division made up some 46% of its annual revenue and 57% of its income last year, and its cable properties are a huge part of that division. Every cord-cutter costs Disney more than $6 a month in carriage fees from cable companies just for ESPN alone. So if there's a mass rush to the exits, Disney could take a big hit to its top and bottom lines.
Already making moves
But we haven't seen a mass exodus, at least not yet. Nielsen has pegged subscriber losses at 7.2% over four years, but Disney executives have said the ratings agency's numbers are overstated.
Even if they are on target, that's a rate of about 1.8% per year, which while concerning, is far from panic-inducing.
There's also no indication yet as to how a long-term move away from the cable bundle would play out for Disney. If ESPN is keeping so many viewers tied to the cord, the company would seem to be in a stronger position to negotiate even larger carriage fees.
On top of that, Disney has already moved to start cutting costs at the sports network, with plans to trim expenses by about $350 million over two years.
The company also recently announced plans for a stand-alone online offering, something Bob Iger said is probably still about five years off.
So while it's still unclear how large a blow Disney might be dealt over time as more people cancel their cable service, it's clear Disney is taking steps to prepare for the shift before it happens at any real scale.
The Force is awakening
But while cord-cutting dominated the Disney discussion after the last earnings report, there have been a number of other positive developments for the company that bring a more bullish case into focus.
First, we have the return of the Star Wars franchise this fall. Merchandise started hitting store shelves on Sept. 4, and at least one analyst expects sales to ring in at $5 billion in the first year alone. Tim Nollen of Macquarie Securities believes Disney should take in about a 10% cut from merchandising rights, which would be a great haul for a consumer-products division that brought in a total of under $4 billion last year.
And Star Wars merchandise sales should have a long runway ahead, with early plans for a new sequel or spin-off every year and generations of fans looking for a piece of memorabilia.
The consumer-products division has been Disney's fastest-growing over the past five years in terms of revenue, and Star Wars should help drive that success forward. Last year, it generated about 8% of the company's overall revenue.
A bigger box office
Star Wars should also help boost sales for the studio division. Some box-office estimates are hovering somewhere around $2 billion for the first film under Disney, Star Wars: The Force Awakens. Combine that with a very successful Pixar franchise and a stable of Marvel superheroes, and the studio division is shaping up for continued -- albeit choppy -- long-term growth.
The studio division made up about 15% of Disney's 2014 revenue.
The parks are growing
Finally, we have Disney's theme parks, a division that grew its revenue by 50% between 2009 and 2014, and made up made up some 31% of the company's overall revenue last year. Even better, it nearly doubled its income over that time, from $1.4 billion in 2009 to nearly $2.7 billion last year, as its parks have become not only better, but also more efficient.
Shanghai Disney will open next spring, with an anticipated 20 million visitors expected in the first year of operations. Back home, Disney has announced plans for Star Wars-themed attractions at both Disney World and Disneyland, something that should have the same draw as Universal's Harry Potter attractions.
Management has earned investors' confidence
Buying Disney now requires confidence that management can navigate very uncertain waters ahead. Cord-cutting presents a major threat to the company over the next several years. But Disney's management has given investors several reasons to be confident given its execution across its business segments in recent years.
The $2.4 billion buyback looks like another smart decision.