Imperial Capital Takes Neutral Stance On Disney, Tackles Pros, Cons Of A Twenty-First Century Fox Deal

Investors may want to consider becoming constructive on Walt Disney Co DIS but only in the event of a "measurable pullback" in the stock, according to Imperial Capital.

The Analyst

Imperial Capital's David Miller initiated coverage of Disney with an In-Line rating and $108 price target.

The Thesis

Disney is stuck in a "very unique" position where three of its core business units — parks and resorts, consumer products and interactive and studio — are operating in a "best-in-class manner," Miller said in the initiation note.

The media networks business continues to face challenges from the cord-cutting trend, lower ratings from the non-sports linear networks and incremental money needed to support BAMTech, of which the company now owns 75 percent, the analyst said. 

Disney's recently introduced ESPN+ gives the company direct exposure to the over-the-top space, but it can't be considered a true catalyst for the business given the lack of NBA or NFL content, Miller said. 

Imperial Sees Positive, Negatives In Fox Deal

Disney's pursuit of Twenty-First Century Fox Inc FOXA has four notable positives, the analyst said:

• Disney wins several Marvel character groups not included in the original Marvel deal that would add value to its Marvel cinematic universe.
• Disney takes over James Cameron's multiyear-long sequel to "Avatar."
• Disney's low exposure to the international market will "change in a fairly dramatic form."
• Disney assumes Fox's interest in Hulu, which gives it a 60-percent majority ownership stake.

The potential negative outcomes of the deal include the following, Miller said:

• The Murdoch family could become a top-10 Disney shareholder and create a "myriad of interest conflicts."
• The inclusion of the F/X channel doesn't fit Disney's profile.
• The price tag on a deal implies a multiple of 16 times on out-year EBITDA, which is "enormous" for the level of scale and content that Disney already boasts.

Price Action

Disney shares were trading up 0.13 percent off the open Thursday at $104.09. 

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