Disney's (DIS) myriad of catalysts ahead is encouraging optimism amongst Wall Street analysts heading into its earnings release after the market close on Wednesday.
For its fiscal second quarter, the company is expected to report quarterly earnings of $1.58 a share on sales of $14.5 billion, marking trimmed estimates on both a sequential and year over year basis due to the scheduling of many key catalysts after the first quarter.
However, the conservative estimates may be a big help to the stock in the view of analysts, as the bullishness of key first quarter indicators, coupled with the movie slate and streaming catalysts upcoming that should bolster long term outlook for the company, make the stock an overwhelming "Buy" on the Street.
"We believe the core March quarter EPS will outperform expectations largely due to the studio business where Captain Marvel's $1 billion global gross in the March quarter was likely ahead of management's projection when it guided to a large decline in film division profits," Loop Capital analyst Alan Gould explained. "Never before have we seen a mega-cap company have so many simultaneous large-scale events - between launching its DTC services, releasing multiple billion dollar-plus blockbuster films and the opening of two major theme park lands this year."
With so many positive indicators still progressing in 2019, he reiterated his "Buy" rating and set a $140 price target. The FactSet consensus price target now sits at $148.05, up significantly from the $125.64 average among analysts polled to begin the year.
Accelerating After Endgame
While the movie Avengers: Endgame will not be included in the second quarter numbers, the catalyst for most market minds is its record breaking success.
"We were pleasantly incorrect about Disney's film slate not being a stock catalyst as Endgame broke records and likely helped drive the stock in recent weeks," BMO Capital Markets analyst Daniel Salmon said. "Endgame's performance is so strong that it likely overpowers our caution on potentially blunted profitability due to higher participations, as the absolute size of the box office gross has become the much more important variable."
With a strong movie slate still to come this year, the studio segment is expected to continue to surge toward all-time high revenues in 2019.
The real indicator for Disney in 2019 is the streaming services that are due out in November, which will be aided by the in-demand content that the company owns and further feeds into the theme parks that rely upon the content that Disney creates.
"We continue to like DIS shares as its DTC ambitions become more tangible; we also believe that it can join Netflix (NFLX) and Amazon (AMZN) among the leaders in global streaming," Salmon said. "Shares may need to consolidate near-term, but potential catalysts include two Star Wars-themed lands opening in the domestic parks this summer, and the launch of Disney+ on Nov 12."
The wild popularity of 2019 releases like Endgame help build a streaming thesis for the company as, after all, content is king.
"Endgame is only one movie, but it's a film that is best understood with an appreciation for the entire Marvel Cinematic Universe, which will be made available on the Disney+," the Action Alerts PLUS team explained. "The immediate positive reception to "Endgame" and the willingness of moviegoers to see it again builds into our belief that the Disney+-- which will also include a vast amount of content from other key brands such as Disney, Pixar, Star Wars, and National Geographic -- will not be watched in a "one and done" setting and Disney will be able to keep users on its platforms despite the incredibly competitive environment."
The fact that Disney already owns each of the properties in its upcoming streaming service is a key differentiator from Netflix, which relies largely on licensed content. The Office, for example, is the number one watched show on Netflix and relies upon NBC permission for hosting. Disney does not encounter this issue.
Analysts have proposed that long term, the triumvirate of streaming platforms in Netflix, Amazon, and Disney, with Apple (AAPL) and Alphabet (GOOGL) participating to a lesser extent, will come to dominate consumer spend on streaming.
"We believe the global TAM for Disney+ is 455 million [people] and the company has the potential to add 170 million subscribers between Disney +, Hulu, and ESPN+ by 2025," Barclays analyst Kannan Venkateshwar said in April. "If borne out, this would make Disney's OTT comparable in scale to Netflix and Amazon."
The question that will remain is whether the company can continue to surprise investors after its investor day in mid-April led to a nearly 20% stock pop before tempering gains. As much of that gain was based on bullishness surrounding the yet to be released Dinsey+ platform, one has to wonder if it is being priced in.
"Current sentiment [is] very positive, but expecting stock to consolidate near-term and asking if next leg up needs to wait for launch of Disney+," Salmon cautioned. He added that the growing pains seen in ESPN+ should provide a degree of skepticism as well.
Nonetheless, he raised his price target to $170 per share from $135, now marking one of the highest estimates on Wall Street.
The key questions that remain for the company, and are likely to be addressed by analysts, are the completed acquisition of Fox (FOXA) and its sale of Sky Plc to Comcast (CMCSA) through the acquired Fox.
"This is an extraordinary and historic moment for us-one that will create significant long-term value for our company and our shareholders," CEO Bob Iger said of the Fox acquisition upon its closing in March. "Combining Disney's and 21st Century Fox's wealth of creative content and proven talent creates the preeminent global entertainment company, well positioned to lead in an incredibly dynamic and transformative era."
The acquisition adds prominent properties like The Simpsons, Deadpool, and Avatar to Disney's already deep portfolio of content.
A new release for the Avatar was recently confirmed for 2021, with four more installments to come through 2027. Long term, this should help steady the studio revenue following the buyout.
In the fallout of the deal, there was one notable loss for Iger, as he was outbid for Sky Plc by Comcast after a bidding war over the UK property reached a lofty valuation at 15 times 2018 earnings.
However, this could be a good thing after Disney sold the stake it owned through Fox to Comcast as part of the negotiation.
For one, it significantly reduces the debt brought on by the Fox acquisition, giving Disney more room to spend on streaming build-outs and blockbuster movie releases.
More recently, the company sold its sports networks to Sinclair Broadcast Group (SBGI) for $10.6 billion and its interest in YES Network to the Yankees, Sinclair, and Amazon for $3.5 billion. The move to divest sports holdings was part of prior agreements with regulators that raised antitrust concerns due to Disney's ownership of ESPN and ABC sports programming.
The two divestments, while taking content out of Disney's catalog, bring the price paid for Fox down significantly. The total price paid for the Rupert Murdoch-run property came in at $71.3 billion, but with the approximately $14 billion divestment of sports programming and $15 billion sale of its Sky interest, the aggregate price tag is nearly halved.
As much of this news is still fresh, analysts are eager to hear an explanation of the M&A action to best model the new Disney sum-of-the-parts business.
Their earnings call is scheduled for 4:30 p.m. ET and will be available here.
(Disney, Amazon, Apple, Alphabet and Comcast are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS, AMZN, AAPL, GOOGL or CMCSA? Learn more now.)