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Disney: 'Stock Price Declines Excessive' -- Barron's Blog

Feb 12, 2016 12:31:00 (ET)



By Ben Levisohn

Hilliard Lyons analyst Jeffrey Thomison contends that the recent declines in Walt Disney's ( DIS) stock--its tumbled 14% so far this year--are "excessive." He explains why:


Fiscal 2016 got off to a good start, with 1Q results well ahead of street expectations. Total revenues rose nearly 14% to $15.244 billion, well ahead of our estimate and street consensus. All major segments posted revenue gains, and all but the two Media Networks businesses reported sharp operating income gains. The Cable Networks business--the largest part of Media Networks--generated a 5% drop in operating income due to several factors, one being subscriber pressures at ESPN. Studio Entertainment had robust gains in revenues and operating income due mainly to the success of blockbuster film Star Wars: The Force Awakens. Parks & Resorts and Consumer Products/Interactive Entertainment also had stellar quarters, in our view. Overall operating income rose 20% and operating margin improved 152 basis points. Diluted EPS excluding nonrecurring items were $1.63 compared to $1.27 a year ago. This exceeded our estimate of $1.43 and street consensus of $1.45.



Despite the good results, investors seem to be fretting about the Media Networks segment and ESPN subscriber levels. We have written in several recent reports on DIS about industry trends in the cable business and how some channels, including ESPN, are seeing drops in subscriber count. This puts pressure on revenue growth and margins at the network. We expect this trends to continue in the next few quarters, but eventually subside as ESPN is one of the most watched and most popular cable channels in the world.



We are maintaining our LT Buy rating but lowering our two-year price target by $10 per share to $120. Our target is based on our revised earnings projections and the business outlook, including what we consider conservative assumptions for ESPN contributions. Our price target represents a future valuation above the current level but still below an historical average.


Thomison's two year price target on Walt Disney shares is $120.

Shares of Walt Disney have dipped 0.1% to $90.23 at 12:25 p.m. today.


More at Barron's Stocks to Watch blog, http://blogs.barrons.com/stockstowatchtoday/

(END) Dow Jones Newswires

February 12, 2016 12:31 ET (17:31 GMT)


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