As a value investor, the recent pullback gives us some opportunity to do some shopping. Here are a couple of names we suggest taking advantage of while they are in the red.
Shares of Walt Disney fell Thursday after CEO Bob Iger offered details of the company’s plans for the future at a Bank of America Merrill Lynch conference in New York. Iger said, “With my tenure winding down, my two biggest priorities are what we announced a few weeks ago, which is the direct-to-consumer proposition of businesses for ESPN and Disney. And secondly, the succession process and a smooth transition for my successor. I'm confident that both will be great for the company. That's how I intend to spend a significant amount of my time in the next year and a half to two years.”
On the topic of streaming, Iger said the company plans to have two services, one for Disney and one for ESPN. Iger explained, “With the Disney direct-to-consumer app or platform is, we are going to launch it in late 2019. We're doing that for two reasons. First of all, as we exit the Netflix output deal, we don't get access to our theatrical release movies until the beginning of 2019. Secondly, we wanted time to actually develop and build up original programming for the platform. So, late 2019, we'll launch a Disney-branded service, it will have – it will be the output distributor for the theatrical release movies. What we announced at earnings, when we announced the BAMTech controlling position is that the Disney movies would be on this platform, we left open what we were going to do with Marvel and Star Wars. We've now decided that we will put the Marvel and Star Wars movies on this app as well. So it will have the entire output of the studio, animation, live action and Disney including Pixar, Star Wars and all the Marvelfilms.”
On ESPN, Iger said, “We're probably going to launch sometime this spring. We will launch with 10,000 live sporting events that are not currently on ESPN's linear channels and those will include Major League Baseball, the National Hockey League, MLS, some tennis and a lot of college sports that we own the rights to already. So, it'll be 10,000 new live sporting events in the first year. On top of the existing ESPN App, in the same app, you'll be able to subscribe to, let's call it, a Plus service, we've not named it officially. You'll be able to have subscribed to significantly more sports programming than you get just through the linear channels. So, if you are a big sports fan, again one app experience, you can watch the liner channels on ESPN, or you can buy up to 10,000 new sporting, extra sporting events for the year. Over time, I think the way you have to look at this is, this will be a sports marketplace platform. Think what iTunes is for instance, where you'll be able to go to the platform and actually buy, almost on an a la carte basis, a sport, a sporting event, a season, a league, maybe a conference, as a for instance, you'll be able to pick and choose over time what it is you want. It won't necessarily be a one-size-fits-all. We may launch it that way, but the goal eventually is to create something that the sports fan can essentially use to design what their sports media experience could be.”
Mergers and acquisitions continue to be a top priority, “M&A has been one of the buckets that we'd allocated capital, and that's actually returned value to shareholders because the acquisitions of Pixar, Marvel, and Lucas clearly enabled us to grow the company and our bottom line. We've shown willingness and to be opportunistic when it comes to M&A, to make some pretty big bets and fortunately of the big ones that we've made, they've really paid off well. The M&A created growth for the company, which enabled us to grow our dividend and also continue to buy back our shares. I think as you look forward, you have to consider, it's likely to continue to be a blend,” explained Mr. Iger.
With one quarter remaining in fiscal 2017, Mr. Iger said that Disney expects fiscal 2017 to be roughly in line with the adjusted EPS from fiscal 2016 ($5.72). The impact of the NBA and big growth in costs for ESPN’s broadcasting rights are expected to weigh on DIS in the final quarter, while the fiscal year does not include the benefit of a big Star Wars movie (in 2016, Star Wars – The Force Awakens raked in over $2 billion at the box office). Although broadcast rights are certainly expensive to get and maintain, we think Disney has done a solid job maintaining quality sports programming, acquiring TV deals and demanding premium fees from consumers and cable companies for their streams. On the motion picture front, Disney’s Beauty and the Beast remake had terrific reception from fans, while Thor: Ragnarok, Coco and Star Wars: Episode VIII drop later this year (followed by Episode IX in 2019). While ESPN continues to be a concern for investors, as evidenced by this week’s drop, we believe that the emphasis on streaming and the draw of live sports will ultimately benefit DIS and its shareholders.
We still like Disney’s diverse revenue stream, loyal fan base, solid portfolio of franchises and unrivaled ownership of priceless content. Though Hurricane Irma has disrupted Disney cruises and temporarily closed the Orlando theme parks, we feel that the company—for lack of a better term—will be able to weather the storm. DIS did not offer any guidance revisions directly related to Irma, but Mr. Iger cautioned that the company has seen “some impact” from the hurricane. Of course, the relatively disappointing outlook for the current quarter was not well received by short-term-focused investors, and we have trimmed our Target Price, but we think DIS should be a core holding in nearly all portfolios.
Comcast, a media giant, theme part operator and internet service provider, also attended the aforementioned Bank of America Merrill Lynch conference, and also managed to spread panic amongst investors after warning that the company expects substantial subscriber loss in the current quarter. Matt Strauss, EVP of XFINITY Services for Comcast Cable said, “Our priorities are actually very focused around three things: continuing to drive our product innovation, continuing to drive profitable growth and continue to improve our customer experience. And we've made investments as you noted over the past few years on really building out our infrastructure, so investing in our cloud technology, deploying DOCSIS, investing in all digital and that has given us the platforms and the ability to launch some really innovative products into the market, and now it's really about the scale and how do we get those products into the most profitable segments at the right pace and obviously as quickly as possible.”
Mr. Strauss continued, “Clearly the trend is more and more of consumption, the videos go to time shifting. This is something you are seeing with the decline in live ratings. I think that's a trend that's only going to continue. I think what people sometimes miscalculate, though, is because they see a decline in ratings, they assume that video consumption is declining and actually it's the opposite. We see video consumption increasing. It's just that more and more is getting time shifted outside of the traditional measurement. So it's almost like dark matter, you know it's there, but it's not fully being accounted for. So in many ways, we think that we're just continuing to tap into the changes in the viewing behavior, which in some ways we've had a huge role in. We launched on-demand 15 years ago.”
For the bad news in Q3, Mr. Strauss said, “You can expect to see us lose in the neighborhood of 100,000 to 150,000 video subscribers and that's going to be partly due to the competition. It's also going to be due in part to the terrible storms that we're seeing, which are affecting two of our divisions. But what you'll also see is us hit our financial numbers, because we're very focused, we're very disciplined and we're really looking at household economics, growing average revenue per user, growing positive cash flow and not getting distracted by unprofitable video subs, but looking at it more through the lens of relationships. And to that end well we'll have a loss on video subscribers; we'll actually have an increase in total customer relationships in the neighborhood of 100,000 for the quarter. So, I think it is the right balance and I think that you will continue to see us appropriately grow video, but do it in a very financially responsible way.”
Although CMCSA shares took a haircut of more than 7% on the news, we continue to like the company’s overall trajectory, which in our view is propelled by its diverse media portfolio (including NBC, Telemundo, E!, NBC Sports Network) and geographically diverse theme parks (Universal Parks & Resorts including Universal Studios Hollywood). Comcast’s quarterly dividend, which was bumped up in the beginning of this year to $0.1575, results in a 1.7% yield. Our Target Price has been edged lower but we think last week’s plunge was overdone.
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