Top Picks 2020: Disney (DIS)

01/13/2020 5:00 am EST

Focus: CONSUMER

Chris Preston

Investment Analyst, Cabot Wealth Network

Walt Disney (DIS) — the company — is universally known and beloved. Disney — the stock — has been overlooked and undervalued, until recently, observes Chris Preston, senior editor of Cabot Wealth Network.

Disney stock was up 30% in 2019, roughly in line with the S&P 500. In the last two years, it’s up just 33.5%. DIS shares currently trade at just 21 times earnings. The company also pays a modest dividend, with a 1.2% yield.

Those numbers are the profile of a fairly conservative safety stock. And yet, Disney is growing like an upstart biotech, at least on the top line.

In the last two quarters, the company’s sales growth has been right around 33%. For the 2019 fiscal year (which ended September 30), sales improved by 17%. Entering 2019, the company hadn’t grown sales by more than 8.4% (in 2014) all decade.

The reasons for the revenue jump are many. Here were the main catalysts.

1) Disney’s flourishing movie studio, which accounted for nearly 40% of the entire 2019 U.S. box office thanks to smash hits like Avengers: Endgame, Frozen 2 and Star Wars: The Rise of Skywalker.

2) A new deal with 21st Century Fox, which closed last March, added $785 million in net income last quarter. Going forward, the Fox addition should only add to Disney’s film studio growth.

3) Hulu. Disney used to own a minority stake in this streaming service; with the 21st Century Fox acquisition, it now owns a majority. The results have been immediate: revenue in the company’s streaming segment came in at $3.4 billion in the last quarter, up from $825 million in the fourth quarter a year ago.

And all of those sales drivers came before the company launched its new Disney+ streaming service on November 12. The service, which costs just $6.99 as a standalone or $12.99 bundled with Hulu and the Disney-owned ESPN+ streaming service, has been a huge hit: it had 10 million subscribers on the first day, and 24 million by the end of November. For comparison, ESPN+, which launched in April 2018, has roughly 3 million subscribers.

Turns out, the Disney name carries a lot of weight with people seeking entertainment options in today’s increasingly congested streaming landscape. By subscribing to Disney+, viewers gain access not only to Disney’s vast library of cartoon and Pixar movie classics, and all the Avengers and Star Wars films, but also to instant-hit originals like The Mandalorian, which gave the world something called “Baby Yoda.”

The addition of Disney+ revenues to the company’s top line should accelerate Disney’s growth in 2020 and beyond. Analysts are expecting another 17% sales growth next year — but many of those estimates came before Disney+ launched and exceeded even the company’s own lofty expectations.

As for the bottom line, Disney’s earnings per share declined roughly 20% last year thanks to heavy investment in the Disney+ launch and the $85.1 billion it shelled out for 21st Century Fox. With those big-ticket items in the rearview mirror, Disney should return to bottom-line growth soon.

Meanwhile, Disney stock is in a very good place, trading above its 50- and 200-day moving averages but down from its late-November/post-Disney+-launch-fervor highs. Given the Disney+ growth to come and the modest P/E, looks like an excellent buying opportunity as we head into the New Year. Buy Disney stock now! 

(Editor's note: Last year, Chris Preston chose Starbucks (SBUX) as his Top Pick; the shares are up 36%. He now says, "The stock may not jump another 36% in 2020. But if earnings don’t disappoint, there’s no reason to believe Starbucks stock won’t continue to trend higher into 2020 and beyond, particularly after getting taken down a few pegs.")

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