Will Disney (DIS) Ride Star Wars, Fox to All-Time Highs?
Disney stock looks like a promising buy on the back of Star Wars success, blockbuster deal to fold in Fox's entertainment assets.
Traders, investors and Star Wars fans alike must be thrilled with Walt Disney Co (DIS, $110.57) these days. As well they should.
In successive days, Disney announced a deal to acquire a large part of 21st Century Fox (FOXA) and debuted the latest installment of the Star Wars saga in a wide release. Whether Star Wars: The Last Jedi can eclipse the $2 billion mark like 2015’s Star Wars: The Force Awakens did (and even beat Episode VII outright) remains to be seen, but its dramatic acquisition of Fox is unquestionably a blockbuster.
Disney stock is trading at a discount to the broader market and sits within reach of its all-time high of $122.08 hit more than two years ago. The blue chip looks like a buy on the heels of this news.
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Here’s why.
Disney the Streaming Giant?
Disney is spending $52.4 billion to acquire Fox’s movie and televisions studios, cable and international TV businesses, local sports channels and some other assets.
The deal does not include Fox's Broadcasting network and local TV stations, Fox News, Fox Business Network, FS1, FS2 and Big Ten Network, as well as the rights to Major League Baseball, the NFL and other professional sports. Fox essentially is selling the parts of the company that make and own TV and movie content, but keeping some parts that distribute it.
The movie and television assets will go a long way toward making the Mouse House a credible competitor to Netflix (NFLX) and all the other companies fighting for a slice of the streaming media pie.
It’s not like Disney really has a choice. A new generation is accustomed to accessing entertainment content over the internet, rather than by traditional means. This deal sets up Disney to be one of the most formidable competitors in this new aspect of the industry.
“Disney now owns a massive catalogue of content,” says Kevin Quigg, chief strategist at exchange-traded fund provider Exponential ETFs. “As they increasingly move into a streaming and direct-to-customer business model, this puts them in a very strong position. They have the ability to create new content and enormous library to make available.”
Disney appears to have found a perfect partner in Fox. Rupert Murdoch realized his media conglomerate never would be big enough to win any kind of battle with Netflix, Amazon’s (AMZN) Prime and the rest on its own. In the “over-the-top” streaming media business, providers need to be able to offer a steady stream of exclusive content to woo viewers. Of course, they also need a prominent brand, and Disney might be the strongest brand in media.
With Fox under its umbrella, Disney will own exclusive access to movies such as Avatar and TV shows like The Simpsons. The deal also brings franchises such as the X-Men and Fantastic Four – plenty to fuel one blockbuster after another.
Disney needs all the ammunition it can get. Netflix plans to spend as much as $8 billion on programming for 2018.
And while Disney announced plans this summer to create its own over-the-top service, which would launch in 2019, the purchase of Fox’s assets – which include a 30% stake in Hulu – opens another potential path. Namely, Disney could buy Comcast’s stake out and build upon Hulu’s established base of 12 million customers in its fight against Netflix.
This isn’t necessarily an open-and-shut case. The Justice Department’s scrutiny of AT&T’s (T) attempt to buy Time Warner (TWX) because of antitrust concerns might mean nothing for the Disney-Fox deal, but it also doesn’t portend anything good. That said, Trump has personally congratulated Murdoch on the deal, so Washington may be more accommodating.
What This Means for Disney Stock
Disney shares are attractively priced at current levels now that the company’s future earnings potential has almost certainly changed.
Shares in Disney – a component of the Dow Jones Industrial Average – change hands at just 17 times next year's earnings estimates. That’s less expensive than the Standard & Poor’s 500-stock index average. And analysts were expecting Disney’s profits to expand by an average of 7% annually for the next five years.
However, Disney believes it will realize cost savings of at least $2 billion from the acquisition, which it expects to close in June 2018. Moreover, with all those Fox properties to help bolster its own streaming potential, don’t be surprised if analysts raise their growth forecasts, and if Disney stock goes along for the ride.
The deal also changes the industry’s bigger picture. Disney’s move to subsume Fox marks the start of a new period in the scramble to build streaming services. “Between Netflix, Amazon, Apple and now Disney, the content wars are on,” Quigg says.
Disney will be as well-armed as any rival once it integrates Fox. With DIS shares trading at a reasonable price, this blue-chip stock looks like a solid bet.
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