BMO Upgrades Disney, Says Stock Has Downside Protection And Upside Potential

BMO Capital Markets' new bullish stance on Walt Disney Co DIS is based on the belief shares have downside protection with catalysts ahead to support upside.

The Analyst

BMO's Daniel Salmon upgraded Disney from Market Perform to Outperform with a price target lifted from $114 to $140.

The Thesis

Disney is hosting its investor day presentation Thursday that should answer the key question "how low does EPS need to go," Salmon said in a note. If downward revisions to EPS estimates are appropriate, it could be viewed favorably as EPS reductions are the result of investments in new services and reinforces a bullish three- to five-year outlook.

In addition to offering clarity on near-term earnings, Disney is likely to also offer commentary on pricing for its streaming video platform. Management is likely to also provide sufficient information to make "informed estimates" of mid- to long-term profit and earnings.

Salmon says the new level of clarity from Thursday's presentation would support a transition to a sum-of-the-parts valuation model for Disney's stock. The move would be similar to how some Street analysts value Amazon.com, Inc. AMZN, which operates individual businesses that each have different financial profiles.

Salmon says a future SOTP valuation of Disney's stock would factor in earnings for the core business along with subscriber and revenue data to derive a value for the direct-to-consumer sub-segment.

The company has "fuel for future EPS" growth over the long term with downside protection at around $100 to $110 per share, according to Salmon.

Price Action

Disney's stock traded marginally higher Wednesday at $117.45 per share.

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