Disney: A Compilation Of Controversies And Catalysts

While most analysts, including those at RBC Capital Markets, maintain a bullish stance on Walt Disney Co DIS, their optimism isn’t proportionately distributed among investors.

RBC analyzed divergent perspectives on Disney’s future in a Friday note highlighting four shareholder debates: sub growth, parks margins, studio success and merger potential.

Sub Growth

Bulls anticipate ESPN sub growth based on DirecTV Now’s fourth-quarter subs and future launches of Hulu and YouTube TV — which could induce inflection in digital and linear subscriber trends beyond -2-percent estimates. On the other hand, bears predict severe and accelerating “linear cannibalization.”

“Much ado has been made of ESPN cord shaving and cutting,” analysts wrote. “However, we think vMPVDs offer some mitigation of subscriber erosion and place new wholesale buyers of media networks into the marketplace. This improves our affiliate outlook for the medium term.”

The RBC thesis is also bolstered by carriage deals in 2017, which are poised to accelerate affiliate revenue.

Parks Margins

According to bears, park pricing, per capita spending and occupancy have no room to expand, and the smallest drop in revenue growth will diminish earnings power. Meanwhile, bulls assert that a strong capex cycle will lead to cost cuts.

Analysts tend to side with the latter. RBC suggested Disney’s diverse portfolio and short-cycle, cash-generative segments will buffer the effects of the company’s longer-cycle, capital-intensive parks.

Peak Studio

Recently, Disney Studio has celebrated unimaginably high success, with record-setting performances of “Beauty and the Beast” and the “Star Wars” franchise.

As bears see it, the only place to go is down. But bulls are optimistic by the company’s increasing cash flow annuities and consistency in delivering hit franchise films. RBC weighed in on the side of bulls.

“While the movie business will always have hits and misses, the combination of Disney live action, Pixar, Marvel and Lucas put the DIS film slate in a league of its own in terms of annual earnings generation, with a powerful link that drives OI at parks and CPIM, as well,” analysts wrote. “In our view, this long-term structural power is one of the best pure assets in all of media.”

Leadership And M&A

Disney announced the contract extension of CEO Bob Iger, and the move prompted varied interpretations. Bulls consider it an indication of a long-rumored sale to Apple Inc. AAPL or another corporate giant, while bears perceive it as proof of weakened governance.

Impending government legislation on cash repatriation will determine the winner of this debate.

The Analysts’ Summary

At this point, RBC acknowledges solid reasoning by both Disney’s bears and bulls.

“Bulls win on pay TV subs (linear and virtual) better than -2 percent year-over-year, parks margins holding in or better and no film flops, while tax legislation would be a further boon,” analysts wrote. “Bears win on cannibalistic subs outpacing virtual, parks margins compress to below about 20 percent and a tentpole film miss, with delays in the Republican legislative agenda providing comfort against a takeout.”

The firm has a $130 price target on Disney's stock.

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