Disney Headwinds Could Soon Shift To Tailwinds; Is Now The Time To Buy?

Over the past few years, Walt Disney Co DIS's investors have had to worry about the same headwind: subscriber losses from its ESPN unit. But these concerns should be considered "overblown," at least according to UBS's Doug Mitchelson, who maintains a Buy rating and $126 price target on Disney's stock.

Disney recently announced its own direct-to-consumer OTT (over-the-top) service for ESPN along with its Disney/Pixar-branded content, Mitchelson commented. While management hasn't yet provided much information about the financial aspect of the service, a serious of reasonable assumptions support management's move.

Overall, the analyst is estimating that incremental operating expenditure and lost revenue will hamper Disney's fiscal 2018 EBIT by only an incremental $270 million and another $200 million in the following year. Granted, while this figure appears to be "significant," it is well below what many investors are assuming.

Disney will likely ramp up its investments in the direct-to-consumer service in fiscal 2020 by $450 million to $550 million, the analyst continued. However, if the service attracts just 3.5 million subscribers at a cost of $5.99 a month then the revenue will match the losses.

Bottom line, Disney's stock will likely move higher as investors continue to recognize how ESPN's headwinds of prior years will now shift to tailwinds. Disney's stock is now trading at a 16.0x multiple on 2018 P/E which is a discount to the S&P 500 index and instead of pursuing dilutive M&A deals the company will continue buying back its own stock.

Related Links:

Should Disney Investors Be Worried About The Latest ESPN Fiasco?

The Netflix Effect Is Only Half The Story For Disney