Disney is trading at a 'historical discount' ahead of its digital makeover (DIS)

pulse

May 1, 2018 5:43 PM

Disney's shares trade at a discount, making this a good opportunity to buy as the company will see major revenue growth in 2020, Morgan Stanley says.

Shares are down more than 10% this year, but Morgan Stanley sees this as an opportunity to buy on weakness.

Disney is setting itself up to compete with Netflix in the streaming age though reorganization and a pending acquisition of key 21st Century Fox assets.

The company's growth opportunities, combined with the its existing intellectual property which continues to bring in revenue through theme parks and a share price that sits at a "historic discount," reinforce Morgan Stanley analyst Benjamin Swinburne's "overweight" rating.

The entertainment giant has been undergoing a reorganization to better compete in an increasingly digital landscape. Younger Americans are increasingly turning to streaming services like Netflix and HBO Go for media content. In fact, 61% of those aged 18-29 said they primarily watch television via online streaming services over cable or satellite subscription, according to a Pew Research study conducted in 2017.

In order to better compete in this new digital era, the company is investing in its own streaming site and said it would pull its content from Netflix after 2018. Its acquisition of 21st Century Fox assets — including 20th Century Fox Movie and Television Studio, Fox regional sports networks, Sky, Fox Networks Group international cable channels, domestic cable channels, and 21st Century Fox’s 30% stake in Hulu — awaits approval from regulators. If it goes through, Disney will gain access to the media conglomerate’s many assets, including the film studio 20th Century Fox, known for movies like “The Sound of Music” and “Avatar.”

Swinburne anticipates Disney's "strategic reorganization" and pending deal with Fox will set the company up to create a global over-the-top (OTT) business that will bring in $6.5 billion in revenue in fiscal year 2020. The OTT business, consisting of film and television distributed via high-speed internet, includes Walt Disney subsidiary BAMTech and Hulu — the child of Disney, 21st Century Fox, Time Warner and Comcast.

As Disney restructures to create a new direct-to-consumer and international segment which will be seen as a global, multiplatform media, technology, and distribution segment, it will continue to see strength from its theme parks, according to Swinburne. He sees the studio division poised to benefit as Disney plans on releasing Han Solo and Incredibles 2.

Swinburne holds a 12-month price target of $130 a share, roughly 30% above where shares are currently trading.

Walt Disney shares are down 10.8% this year.

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