Media

Analysts Make Key Changes to How They Rate Disney After Earnings

Jon C. Ogg

Published: August 14, 2016 10:25 am

Last Updated: January 13, 2020 4:36 am

Walt Disney Co. (NYSE: DIS) has not had a good 2016 as far as its stock is concerned. The week of August 12 brought earnings, and the shares closed up only 1% from the prior week. All in all, Disney shares are down by 7.2% so far in 2016, and they are down 8.7% from this time a year ago.

24/7 Wall St. already covered the earnings report in depth, as well as Disney’s $1 billion investment into the streaming BAMTech. The report was not dismal, but there remains a lot of infighting and outside views over how the world of cord-cutting and streaming will help or hurt Disney’s operations in ESPN and networks in the years ahead.

We took a look at the various Wall Street research reports from reputable firms. Some remain cautious due to valuations. Others look extremely bullish, as though every kid in America should own Disney shares.

The S&P 500 is now trading at 18.1 times forward 12-month earnings, and Disney’s premium has compressed to just under 16 times forward earnings. Here is how analysts have changed their views on Walt Disney for the rest of 2016 and into 2017.

Merrill Lynch’s Jessica Reif Cohen reiterated her Buy rating on Disney and maintained her $125 price objective. She said that Disney remains a high-quality growth story. She gave four points that are multiyear growth prospects:

• Shanghai/China potential,
• a solid pipeline of theatrical and consumer products fare,
• stable-to-low-growth Media Networks,
• best-in class Parks (with added benefit from cost saving initiatives).

Merrill Lynch’s investment rationale said:

We believe Disney shares will outperform peers given their exposure to accelerating Parks & Resorts fundamentals, a surge in free cash flow (aided by the end of a major investment cycle), an increasingly positive Studio outlook, steady growth at Media Networks and improving profitability at Interactive.

Another positive report came from the firm Hilliard Lyons’s Jeffrey Thomison, who reiterated his Long-Term Buy rating, with a $120 price target. One key focal point here was Iger’s effort to get into streaming by a $1 billion investment into BAMTech. That report said:

Disney also made an announcement that we consider just as important, if not more so, than 3Q results. Disney has made a $1 billion investment, representing a 33% stake, in BAMTech, a privately held technology services and direct-to-consumer video streaming company originally formed by Major League Baseball. Disney has the right to purchase 100% of BAMTech if it chooses. The strategic plan will initially include streaming of complementary ESPN-branded content, and potentially other content from Disney’s many brands and businesses. We believe this new initiative has favorable near-term and long-term potential.

24/7 Wall St. tracked several other key analyst target price changes as well:

• Citigroup maintained a Buy rating, but the firm lowered its price target to $117 from $120.
• Cowen maintained its Market Perform rating but raised its price target to $90 from $88.
• Goldman Sachs kept its Neutral rating but lowered its price target to $108 from $109.
• Loop Capital maintained a Buy rating but trimmed its target to $114 from $115.
• Pivotal Research has a Buy rating but lowered its price target to $118 from $122.
• S&P maintained a Buy rating but kept its 12-month target price of $110.

Credit Suisse reiterated its Outperform rating and it has a $128 price target. The valuation is now at 9.7 times 2017 EV/EBITDA, and while that is within the peer group, Credit Suisse thinks Disney shares could be valued 12.2 times for its $128 price target. The firm’s Omar Sheikh and Lawrence Dann-Fenwick talked up the long-term value in four reasons:

• The world-class quality of its IP, including Pixar, Lucasfilm, and Marvel.
• ESPN controls the largest live sports rights portfolio in the US, which makes it “must-have” for any video distributor and which confers significant pricing power long term.
• Disney’s other TV networks (ABC, Disney Channel) are also important to distributors and advertisers given a strong offering of drama, comedy and kids programming.
• Disney’s premium valuation is justified by the value of its brands and strong operating performance.

Macquarie was a standout call in Disney. The firm raised its rating to Outperform from Neutral and raised its target price to $110 from $95. One thing that might be worth noting here is a visit back into history: it was on January 5, 2016, that Macquarie downgraded Disney to Neutral from Outperform, back when shares were at $102.98.

It should be noted that Disney shares have so far handily disappointed versus the 24/7 Wall St. 2016 bullish and bearish outlook from the start of this year. Still, it remains one of 10 stocks to own for the decade.

Disney shares closed at $96.84 on Friday, and the consensus analyst price target is $109.63. The 52-week trading range is $86.25 to $120.65. The company has a market cap of $158 billion.